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We act for a married couple who own four properties, each in a different location. Each property is worth around £100,000, with a mortgage attached of some £80,000. The husband is a higher-rate taxpayer and the wife has no other income. It would therefore seem sensible to transfer the properties into the sole ownership of the wife. Inheritance tax planning is not a high priority for the couple. The husband would prefer to transfer the properties by using a 'declaration of trust' as this avoids the requirement to get the mortgage lenders involved, which can be time consuming and costly.
We act for a married couple who own four properties, each in a different location. Each property is worth around £100,000, with a mortgage attached of some £80,000. The husband is a higher-rate taxpayer and the wife has no other income. It would therefore seem sensible to transfer the properties into the sole ownership of the wife. Inheritance tax planning is not a high priority for the couple. The husband would prefer to transfer the properties by using a 'declaration of trust' as this avoids the requirement to get the mortgage lenders involved, which can be time consuming and costly. A number of issues arise from this proposed course of action.
First, is the declaration of trust effective for income tax purposes?
Secondly, the mortgages are currently in joint names. Are there any issues with the deduction of interest in the future?
Thirdly, although the mortgage is not being transferred into joint names, would the Stamp Office treat half of the mortgage as consideration for the transfer?
Fourthly, if half of the mortgage is treated as consideration, the transfer of one property would be within the stamp duty land tax threshold. However, would the Stamp Office treat the transfer of four properties as linked?
And finally, if the transfers would be treated as linked transactions, could one property be transferred each year to avoid this problem?
Readers' thoughts are welcomed.
Query T16,702 — R.C.
Reply by Neto de Conde:
With regard to whether the rental surplus would be deemed to be that of the husband, the issue is whether there are 'any circumstances' in which the wife's beneficial interest in the property could be applicable for 'the benefit' of the husband under ITTOIA 2005, s 626(4)(b)(ii),(iii). It seems that this would be the case if a property fell in value before sale and part of the current gifted surplus had to be applied in paying off the husband's 'half' of the mortgage.
It is likely that the two borrowers are jointly and severally liable and, in consequence, there would be no grounds for refusing a deduction from the rental income for income tax on 'property income' purposes. The position would, however, be clearer if the declaration of trust contained an indemnity from the wife in this respect.
The stamp duty land tax position is, however, dependent upon whether such an indemnity is either expressly given or can be implied from the circumstances. In such an event, FA 2003, Sch 4 para 8(1A)(b) and (1B)(a) would require half the mortgage to be included in the taxable quantum. The only really safe scenario would be if the husband gave the wife an indemnity. This would, however, have the effect of depriving her of income tax relief on half the interest paid.
Under FA 2003, s 108(1), it is almost inevitable that, if the transactions were carried out in short order, they would be 'linked'. That much is quite clear from the consideration of the preceding stamp duty provisions in Attorney-General v Cohen [1937] 1 KB 478.
As FA 2003, s 108(1) can apply to linear, as well as contemporaneous, transactions, it is very far from clear that a phased one-a-year operation would involve either (by the operation of a similar concession to that in the manual relating to the exercise of options) successive or, possibly, retrospective, aggregation, with interest on the past underpayments in the latter event.
Section 108 was plainly intended to apply, primarily, to parallel transactions, i.e. buying half Blackacre from husband and the other half from wife. But it is extended, specifically, to the grant and exercise of options — although the draft Stamp Duty Land Tax Manual does not reopen the tax computation on the former on the latter event; it merely collects the balance on exercise. The inserted FA 2003, Sch 17A para 5, envisages s 108's application to linear transactions; e.g. the renewal of a lease, but HMRC do not seem to know in what circumstances and did not bother to specify this in Sch 17A (except in para 14, where it had to be provided for).
Reply by Kalonymous:
It is assumed from the context of the query that the four jointly-owned properties in question are income-generating and are in addition to the couple's marital home.
In a case like this, the tax position would generally follow the factual background. Therefore, if the husband and wife are the legal trustees of a trust of land and the wife is the sole beneficiary, then it would follow that the wife would be solely liable for any income arising.
However, the declaration of trust is not, in my view, sufficient because of TA 1988, s 282A, which provides that any property in the joint name of a husband and wife will give rise to income that is jointly and equally assessable on the two spouses. If, as is proposed, the wife is to be the sole beneficial owner, s 282A(3)(a) requires the couple to make a joint declaration under TA 1988, s 282B using HMRC's form 17.
However, if HMRC were to prove that the arrangement was merely a sham (in that the couple continued to treat the income and capital assets as if they were jointly owned), the courts would look through the declaration of trust and hold that the income continued to be jointly assessable.
Further difficulties might be encountered with respect to the mortgages (although the precise position depends on the terms of the loans involved). If the wife does not assume full responsibility for the mortgages, it will be arguable that she will not have incurred any interest payments wholly and exclusively for the purposes of the UK property business she now carries on (beneficially, at least) alone.
Conversely, any assumption for the mortgages would be treated as consideration for the purposes of SDLT. This will be of significance because the transactions would be between the same persons and thus linked (FA 2003, s 108(1)). Therefore any consideration would need to be aggregated (FA 2003, s 55(4)). There is no rule that allows one to separate transactions entered into in different years — they are linked if they 'form part of a single scheme, arrangement or series of transactions' (s 108(1)).
Some planning is nevertheless possible. If the wife took on only £120,000 worth (or £150,000 if the land is not wholly residential) of the mortgages, then there should be no exposure to SDLT. Alternatively, the couple might consider realising gains from their current properties and reinvest elsewhere under arrangements that are more tax efficient from the outset.
However, before embarking on any exercise, the potential tax savings should be first calculated. In such a situation, one should also bear in mind any future exposure to capital gains tax (if the properties are likely to be sold soon) or inheritance tax if the couple's estates are not fully using the nil-rate band.
Another possible cause of concern is the settlements legislation now found in ITTOIA 2005, Pt 5 Ch 5.
Until earlier this year, no-one would have thought that these provisions (then embodied in TA 1988) would have applied, since the transfer of an interest in property would (in these circumstances) have represented more than a mere right to income and therefore the exemption for spouse transfers would have applied. However, Mr Justice Park in Jones v Garnett gave the exemption (currently in ITTOIA 2005, s 626) a narrow meaning.
To ensure that the clients do not fall foul of this narrow reading, it would be advisable to ensure that the transfer to the wife is indeed an outright gift and not a purchase at an undervalue.
One hopes that the Court of Appeal, when it hears the Jones case next month, will give the spouse exemption a wider and more workable meaning. Judgment is expected by mid-January and so R.C. might wish to wait until the scope of these provisions is more settled.
