The 3 Stages of Changing the Beneficial Interest in a Property

The 3 Stages of Changing the Beneficial Interest in a Property

In brief

• Changing who benefits from a property needs to be done in a clear, documented order.
• The legal title, the beneficial interest and the tax position can all be different.
• Spouses commonly change ownership shares to make better use of tax allowances.
• A change of beneficial interest has to be real, and HMRC will look for proof.

Legal title and beneficial interest

A property has a legal owner whose name is on the Land Registry. It also has beneficial owners who are entitled to the income and sale proceeds. These are often the same people, but they do not have to be. Joint owners can hold as joint tenants, who share equally, or as tenants in common, who can hold unequal shares. Tax follows the beneficial interest.

Working through a change

A sensible process has these stages.

Check the starting position. Work out who owns the property now, how it is held and what the mortgage and lender terms say. Look at the title documents and any existing declaration of trust.

Document the change. The new shares should be set out in a signed deed or declaration of trust. If the holding is changing from joint tenants to tenants in common, a notice of severance may also be needed. The legal side is for a solicitor.

Deal with the tax and reporting. Think about Capital Gains Tax, Stamp Duty Land Tax and the way income is reported. Spouses and civil partners living together can transfer assets between them at no gain and no loss. A transfer to anyone else is a disposal at market value. If the property is subject to a mortgage, the assumed debt can count as payment for SDLT. Income from jointly owned property is normally split equally between spouses, unless a declaration of trust and a Form 17 election are made to reflect a different split.

Why spouses do this

A couple may wish the spouse with the lower income to own more of a rental property, so that the rental profit is taxed at a lower rate. The same logic applies to sale gains, where each person has an annual exempt amount and basic rate band. The transfer must be genuine, the spouse must have the benefit of the income, and the arrangement must not be a sham.

Other points

• lender consent may be needed
• the Inheritance Tax position should be reviewed, since a gift to a non-spouse is a potentially exempt transfer
• a will should be updated afterwards

See our page on Capital Gains Tax for property.

Frequently asked questions

Do I need to tell HMRC about a change of shares?

For spouses with an unequal split in a jointly owned rental property, a Form 17 election is made with a declaration of trust. Other reporting depends on the facts.

Is SDLT payable on a transfer to a spouse?

It can be, if there is a mortgage that is taken over.

Can I backdate a change?

No. A change takes effect from the date it is made.

If you would like to talk this through for your own situation, book a free call with our team.