Splitting rental income options with spouse?

by Readers Question

9:09 AM, 21st June 2019
About 7 months ago

Splitting rental income options with spouse?

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Splitting rental income options with spouse?

I own the house I currently live in as a sole owner. I am a higher rate tax payer, while my wife currently has nil income. We are looking to move to a another property and rent the one we are in right now on a AST. I’d like to split the rental income in a tax efficient manner (100% wife, 0% me, if possible). Value of the property is £500k, with an o/s £400k mortgage (75% LTV).

I believe I have 3 options:

Option 1: Sign a Declaration of trust with wife to split the beneficial interest 100%, 0%. Legal title is unchanged so I don’t need to inform mortgage company or change land registry. Form 17 doesn’t need to be filled as property is not under joint ownership.

This sounds straightforward, perhaps too much to create a doubt in my mind. Seems like no-one needs to know? We only declare this to HMRC in our respective self assessments when declaring property income.

Are there any CGT or SDLT liability associated with this?

Option 2: Form a partnership, register the with HMRC and obtain a UTR , allocate 100% of partnership profits to wife on the basis that she runs the business entirely.

No CGT, SDLT issues to consider.

Form 17 doesn’t need to be filled in Option 1 and Option 2 as the property is still in sole ownership.

Option 3: Transfer 10% equity to wife (i.e £40,000 mortgage liability) to avoid any SDLT. (Is this an annual benefit? So I can increase this is in Year 2?) . Then form a partnership as per Option 2. Over and above Option 2 this would allow us to use individual CGT exemptions at the point of sale.

No CGT, SDLT liability still

I suppose in this option I need to inform mortgage company so best done at the point of remortgaging. Also I have to get the deeds updated through a solicitor. Form 17 needs to be filled if we split the income individually? And not, if we operate under a partnership?

Is my understanding of the options correct? Would all the above achieve my primary objective of transferring rental income to my wife?

Many thanks

Rish

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Comments

Neil Patterson

9:14 AM, 21st June 2019
About 7 months ago

Hi Rish,

First of all please see >> https://www.property118.com/new-sdlt-rules-can-help-smaller-landlords/

"HOWEVER, the new rules confirm that the additional 3% of Stamp Duty does not apply to transfers between spouses. For landlords who wish to share beneficial ownership with spouses for tax planning purposes this is extremely welcome news, particularly for landlords whose properties are mortgaged.

Here’s an example:-

Mrs X is a higher rate tax-payer. She has one rental property in her own name; an HMO worth £300,000 which produces £10,000 of net profit after deducting £10,000 of mortgage interest and £10,000 of other expenses.

However, as a result of the restrictions on finance cost relief, in the 2017/18 tax year she will pay tax 40% tax on £12,500 and get a tax credit of 20% of the extra £2,500 of disallowed interest. The result is £4,500 of income tax.

It gets worse, in fact MUCH worse.

In the 2018/19 tax year she will pay tax 40% tax on £15,000 and get a tax credit on 20% of the extra £5,000 of disallowed interest. The result is £5,000 of income tax.

In the 2019/20 tax year she will pay tax 40% tax on £17,500 and get a tax credit on 20% on the extra £7,500 of disallowed interest. The result is £5,500 of income tax.

And in the 2020/21 tax year and thereafter she will pay tax 40% tax on £20,000 of profit and get a tax credit of 20% of the extra £10,000 of disallowed interest. The result is £6,000 of income tax.

The good news is that, because her wife has no income at all, there is a tax planning opportunity to transfer the beneficial interest in her property to her wife without having to refinance. On that basis, the whole of the £10,000 of profit will be tax free and her wife will be completely unaffected by the restrictions on finance cost relief. There is no CGT on transfers between spouses, but there is Stamp Duty if there is a mortgage because mortgages are are deemed to be a consideration on the basis that a liability cannot be gifted according to HMRC rules – see example 2 on the HMRC website via THIS LINK.

Prior to the change of policy, the maximum consideration which could be transferred to a spouse without incurring the additional rate of Stamp Duty was £40,000. However, following the change there is no additional rate of Stamp Duty payable on transfers between spouses at all. The normal rate of Stamp Duty ONLY becomes payable if the mortgage consideration exceeds £125,000."

Mark Alexander

9:44 AM, 21st June 2019
About 7 months ago

SDLT of £10,000 would be payable for option one, because the adoption of the mortgage liability would be treated as consideration for SDLT purposes.

In regards to option two - an ordinary partnership can only exist where there is a business. It would be tough to argue that a business exists where there is only one property.

Option three has the same issues as the above.

There may well be a way to achieve the outcome you are seeking using an LLP, particularly if it is your intention to add more properties, because that would strengthen the argument for using a business structure of this nature.

You will also need to refinance onto a BTL mortgage or obtain consent to let from your existing lender. Likewise, you will need a different insurance policy.

Why not just sell your current home, form a Limited Company, lend the net proceeds of sale to the company and look to invest into property via the Limited Company? You would be less emotionally attached to those properties and if you choose wisely they might provide higher returns on capital invested.

Rish

11:17 AM, 21st June 2019
About 7 months ago

Reply to the comment left by Neil Patterson at 21/06/2019 - 09:14
Thanks Neil. I knew about the section 24 changes but not about the changes to SDLT, the fact additional SDLT wouldn't be applicable on transfer to spouse.

So in my case, technically I can transfer 31.25% of the equity in the property (£125k/£400k) without incurring any SDLT or CGT liability. Would rental income by default also be split in the equity proportion?

Then can i not fill a form 17 to split the beneficial rental interest differently to the equity split? Or is that option only available when I own the property in joint, 50/50 ownership?

Mark Alexander

11:46 AM, 21st June 2019
About 7 months ago

Reply to the comment left by Rish at 21/06/2019 - 11:17
The income share to your wife would need to be in accordance with her beneficial ownership share, i.e. 31.25%

Form 17 would not be applicable.

The alternative of paying a one off £9,900 of SDLT to transfer 99% of beneficial interest, and hence income, to your wife might make more sense over the longer term. Some complex number crunching would be necessary to consider the commerciality and pay back period. I can assist you with that if you book a tax planning consultation, but not until mid July because my calendar is full until then, mainly due to holidays.

Rish

12:40 PM, 21st June 2019
About 7 months ago

Reply to the comment left by Mark Alexander at 21/06/2019 - 09:44
Ok so Option 1 is out unless the solution in my reply to Neil can work.

I am planning to invest in another residential property. So a partnership can work if I bring this property into it as well I am assuming as it will be a business. Does the ownership of the new property have to be in our individual names (joint or solo)? (as opposed to limited company)

Am I right that in 3 years time, I can incorporate the partnership into a company after which point mortgage interest becomes fully tax deductible? (Although interest may be higher under a company mortgage..) And there would be no SDLT or CGT liability of doing this?

I don't have emotional attachment to the current property but selling market isn't great right now to get me a good offer. Besides, I am looking to avoid SDLT liability which I would incur once I buy a new property under a limited company structure.

Rish

12:48 PM, 21st June 2019
About 7 months ago

Reply to the comment left by Mark Alexander at 21/06/2019 - 11:46
Thanks, this option is clearer now. Does form 17 only come into play if the property is under joint ownership, say 50/50?

Would the objective be achieved then if the mortgage liability was £250k instead then I could transfer 50% ownership to wife to make the ownership joint. And then use form 17?

Is the £125k rule a one-time absolute rule or annual? As an example, could I transfer a 31.25% share today and then say 18.75% in a few years when the mortgage liability has reduced while still legally avoiding SDLT liability at all times?

Rish

13:31 PM, 21st June 2019
About 7 months ago

Reply to the comment left by Rish at 21/06/2019 - 12:48
Thanks Mark and Neil for taking the time to reply. I really appreciate it.

As an extension to my comment, after reading your kind replies what do you think about the following option?

Option 4: I change from sole ownership of the property to joint ownership (50/50). On the basis of the current mortgage liability this would amount to a £200k consideration which would incur an SDLT liability of £1,500. I remortgage on a BTL mortgage on a joint ownership (it's due in a few months anyway).

I then use a DoT to split the beneficial interest in a 99/1 basis and inform HMRC using form 17.

As the legal title and mortgage liability will continue to remain 50/50, am I right that this option would not incur any further SDLT charge (over and above the £1,500 I mention above)?

If yes, this seems like the most effective option so far. I then need to get help in drafting all the documents I require in this case.

Simon Lever

10:59 AM, 22nd June 2019
About 7 months ago

First off whatever you are going to do, take professional advice.
You could consider forming a partnership with just you and your wife, transfer 1-5% of ownership to her. In a partnership the split of profits can be any ratio that the partners decide on so although the underlying ownership is mostly with you the split of profits can be 95%:5% in favour of your wife.
You would need to set up a separate business with its own UTR number in order for the partnership rules to kick in.
If you consider this to be too risky then you could add another partner to the partnership which would break the husband:wife 50:50 situation.
If you formed a limited company owned by your wife and you, the company could become a partner in the partnership and receive some of the profits each year. Tax at 20%, no NI (there might be some on you personally if the partnership is seen as a business), full relief for interest, and profits could be allocated as desired. Dividends from company to you and wife, to limit of £2,000 per annum, are taxed at 0% (subject to other dividend income).
If you have kids then they could become shareholders in the company, use alphabet shares and varying rights to maximise IHT reliefs.
Future property purchases could be through company in future.
However this is some complicated planning and I would only suggest it if you plan to create a reasonable sized property portfolio.
Don’t forget – take professional advice before doing anything.


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