Using Declarations of Trust in Property Ownership: What Landlords Should Know About Tax Planning

Using Declarations of Trust in Property Ownership: What Landlords Should Know About Tax Planning

Property ownership is not always as straightforward as it appears on the title register. In many cases, the way a property is owned behind the scenes can be just as important as whose name appears at the Land Registry.

One mechanism that landlords sometimes consider as part of wider tax planning is a Declaration of Trust. Used properly, it can help reflect the true financial arrangement between co-owners and, in some circumstances, support a more efficient tax position.

However, it is not a shortcut, and it is not appropriate in every case.

What is a Declaration of Trust?

A Declaration of Trust is a legal document that records how a property is owned beneficially, rather than just legally.

For example, two individuals may be registered as joint owners at the Land Registry, but a Declaration of Trust can specify that the underlying beneficial interest is held in different proportions. Those proportions can reflect contributions to the purchase price, mortgage payments, or other agreed arrangements.

The document creates clarity and certainty as to who owns what, regardless of how the legal title is held.

Why Declarations of Trust are relevant to tax

For landlords who own property jointly, rental income and capital gains are generally taxed in line with the beneficial ownership, not simply the legal title.

Where a Declaration of Trust accurately reflects a genuine arrangement — for example, one party being entitled to a larger share of rental income — it may allow income to be taxed in a way that better reflects the parties’ respective positions.

In some cases, this can result in a lower overall tax liability, particularly where co-owners are taxed at different rates.

The importance of substance over form

It is essential to understand that Declarations of Trust are not a device to artificially reduce tax. HMRC looks at the substance of the arrangement, not just the document itself.

The declared ownership proportions must reflect reality. If income, mortgage payments, or control of the property do not align with the stated beneficial interests, the arrangement may be challenged.

A Declaration of Trust works best where it documents an arrangement that genuinely exists, rather than attempting to create one retrospectively for tax purposes.

Interaction with HMRC and Form 17

In certain situations, particularly for married couples or civil partners, HMRC requires additional steps to recognise unequal beneficial ownership for income tax purposes. This can include submitting Form 17, along with evidence of the beneficial interests.

Failure to follow the correct process can result in HMRC continuing to tax income on a default basis, regardless of any private agreement between the parties.

This is an area where professional advice is especially important.

When Declarations of Trust are commonly used

Declarations of Trust are often considered where:

• Property is owned jointly but financial contributions are unequal

• One owner is a higher-rate taxpayer and the other is not

• Rental income is intended to be distributed other than equally

• There is a desire for clarity around long-term ownership and exit arrangements

They are also useful beyond tax, including in estate planning and asset protection contexts.

Why careful drafting matters

A poorly drafted Declaration of Trust can create uncertainty rather than resolve it. Ambiguous wording, failure to align with mortgage arrangements, or inconsistencies with how income is actually handled can all cause problems later.

Because the document can have long-term legal and tax consequences, it should be prepared carefully and in conjunction with appropriate professional advice.

A measured, joined-up approach

Declarations of Trust can be a legitimate and effective part of wider property planning, but they are not suitable for everyone and should never be used in isolation.

For landlords, the key is taking a joined-up approach: understanding ownership, management, financing and tax together, rather than making piecemeal decisions.

At Hermens, we regularly work alongside tax advisers and accountants to ensure that property arrangements are structured clearly and documented properly, while remaining compliant and robust.

Important disclaimer

This article is provided for general information only.
It does not constitute legal or tax advice.

The tax treatment of property ownership depends on individual circumstances, and landlords should always seek independent advice from a qualified tax adviser or accountant before entering into, varying or relying on a Declaration of Trust for tax purposes.