Subletting to spouse for tax purposes?

by Readers Question

19:14 PM, 1st March 2017
About 2 years ago

Subletting to spouse for tax purposes?

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Subletting to spouse for tax purposes?

My property portfolio is in joint names with my son. 95/5 split to me. sublet

I collect all the income, my son receives no income, and I declare 100 per cent on my tax return. My husband is about to retire and will therefore not be utilising his tax allowance.

Is it possible for me sublet the properties to him on a non-assured shorthold tenancy and for him then to sublet the properties on an assured shorthold tenancy?

My income would then be the rent I receive from my husband and my expenses would be mortgage costs. His income would be the rent he receives from his tenants and his expenses would be his rent to me and the running costs of the property.

Would Inland Revenue recognise this structure in relation to our individual tax, ie I would be taxed on the rent I receive from my husband less my expenses and he would be taxed on the rent he receives from his tenants less his expenses or would they ignore this structure and tax me as the property owner as if this structure did not exist?

Many Thanks

Dee



Comments

Mark Alexander

6:35 AM, 2nd March 2017
About 2 years ago

Hello Dee

The structure you have outlined would fall foul of HMRC's alienation of income rules. You would still be taxed on the entire income because you cannot transfer an income stream without transferring the asset.

I can immediately think of two better structures.

Transfers between spouses are exempt from CGT. Therefore, you could amend the Declaration of Trust you must have with your son to to divide beneficial ownership 95/5 to include your husband as well. This will mean that your husband will own rights to treat income/expenses and capital in accordance with ownership.

If you want to make the arrangement even more flexible then you could declare it as a partnership by obtaining a partnership UTR from HMRC. You would then need to file annual partnership tax returns. The beauty of this is that the partners can then decide how to allocate profits between them. The allocation of profit share does not have to follow the share of ownership and can be changed whenever the partners agree, e.g. to suit their needs and to take full advantage of their tax allowances. Allocated profit doesn't have to be the same as drawings either which gives scope for IHT planning too.
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Dee Mc

8:44 AM, 2nd March 2017
About 2 years ago

Hi Mark,

Thanks for your response.

My local university have head leases whereby you let your property to them annually and they sublet to students. Similarly so does the council. That's why I thought I could apply the same structure with my husband.

The properties are mortgaged. I was therefore looking for a way to split the profits between my husband and myself without having to add his name to the title at HM land registry or the mortgage. The mortgages are on fixed terms so I don't want to trigger early redemption fees. Also, I'm not sure whether our mortgage provider would allow 3 people on the mortgage and even if they would, whether my husband would fulfil their criteria. Would either a declaration of trust or partnership agreement be possible without changing the title deeds at HM LAND REGISTRY or the mortgage? I don't mind adding his name to the title deeds if necessary so long as it doesn't mess up the mortgage.

Mark Alexander

9:02 AM, 2nd March 2017
About 2 years ago

Reply to the comment left by "Anonymous " at "02/03/2017 - 08:44":

Hello Dee

The arrangement offered by the University or the Council would be "at arms length", hence it wouldn't fall foul of HMRC's alienation rules. The same could not be said for a similar arrangement with an immediate family member or a company in which you or an immediate family member are shareholders.

There would be no requirement to change mortgage arrangements based on the suggestion I have made above. To learn more about this please see our Landlord Tax Tutorials >>> https://www.property118.com/landlord-tax-tutorials-2/

I particularly recommend the following titles .....

Is tax planning legal?
Tax planning opportunities where spouse earns less than £43,000 a year
Declaration of Trust – tax planning

Ideally you should consider a private consultation, please see https://www.property118.com/optimal-tax-planning/91857/

The cost of the consultation is £400. The cost of implementing the strategy I have suggested above will be £250 + VAT for the legal work plus fees charged on a time spent basis by your accountant.
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Dee Mc

10:01 AM, 2nd March 2017
About 2 years ago

Hi Mark

So basically are you saying we can restructure our property business without any changes to the title deeds at HM LAND registry so therefore no need to inform our mortgage provider?

Also a private consultation can advise us how to structure our business in a way to fully utilities our tax allowances, not change the title deeds at HM LAND registry, not have to advise our mortgage provider and be designed in such away that it can be varied at anytime with little or no fuss to suit our needs or change in circumstances? If so, this sounds like what we need. Also, will the consultation be able to advise on the effects should there be a divorce.

Mark Alexander

11:55 AM, 2nd March 2017
About 2 years ago

Reply to the comment left by "Anonymous " at "02/03/2017 - 10:01":

Yes, that is exactly what I am saying. I look forward to receiving your booking.
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George Harrison

17:37 PM, 2nd March 2017
About 2 years ago

Hi Mark
I to am looking to to have a private consultation but am wary about the government moving the goal posts over the next few months and the advice you give me becoming redundant ie there is speculation (NLA) that the government will do a type of section 24 on limited companies

Mark Alexander

17:51 PM, 2nd March 2017
About 2 years ago

Reply to the comment left by "George Harrison" at "02/03/2017 - 17:37":

Hi George

There is no answer to that.

In my opinion the scaremongering the NLA has put out is very irresponsible. It's not a first for them either. They advised their members not to support our case against the West Brom too. We went on to recover £27,500,000 of illegally overcharged tracker mortgage interest. Their stance could so easily have derailed our efforts.

A cynic might suggest they are working with Government on this.
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