Using a deed of trust to mitigate the impact of Section 24 and save taxFirst Published: November 2016 | Available in: Property Articles Your Property Network
The forthcoming mortgage interest relief restrictions – starting in tax year 2018 – mean that for many landlords there is a substantial benefit in re-structuring the beneficial ownership of their portfolio, through the judicious use of a ‘deed of trust’ (DOT), in order to make full use of spousal and family Basic Rate tax bands. But what is a deed of trust exactly, why are they beneficial, and how are they properly put into practice?
What is a deed of trust (DOT) exactly – I’ve heard the term, but never really understand what a deed of trust actually is!
A deed of trust is a legal document that enables the ‘beneficial’ interest in a property to be assigned to a different person than the underlying legal owner.
Putting a DOT in place has the effect of ‘diverting’ the income on a property from the legal owner to the person named on the DOT – this can be very beneficial where there is a tax advantage to be gained by such a transfer of interest.
From a tax perspective, there is a distinction between legal and beneficial ownership. The legal ownership of a property is whoever the Land Registry owner is, and if the property is mortgaged, who the mortgagee is. However, it is the ‘beneficial’ owner of a property that is taxed on the property income. Crucially, the DOT enables the legal and beneficial ownership to be detached from one another.
Does this mean that I need to re-mortgage my property if I put a DOT in place?
Normally, there is no need to notify a lender of a DOT, as the DOT simply transfers the rights to the mortgaged property’s income from one person to another. However, care should be taken to review any lender’s terms and conditions regarding any DOT, as lenders have differing approaches to the concept of a DOT.
OK – so how could a DOT help me save tax?
‘Section 24’ refers to the forthcoming mortgage interest relief restrictions, which apply to mortgaged residential property investors as of tax year 2018. These changes mean that mortgage interest will be restricted to the Basic Rate of income tax, from tax year 2018, gradually phasing in over tax years 2018 – 2021.
The effect of these restrictions will be to push many current Basic Rate taxpayers into the Higher Rate of income tax – essentially, such landlords will pay Higher Rate income tax on their pre-interest property profits, while only receiving Basic Rate tax relief on mortgage costs, which for some will result in effective tax rates on cash profits of 60-100% (in some cases a tax results from an actual cash loss).
By putting a DOT in place, a landlord could ‘transfer’ the income in a property from themselves to another person who may not be in such a position – namely, a person for who, even considering the