BTL house for Wifes Sister, Tax implications

by **Jaff** on Wed Jan 25, 2012 4:29 pm

My wife and I have just bought a house to let to my wife's sister after a recent divorce left her short of funds.

We had the majority of the purchase price in the bank, and took out a small mortgage on our own house to raise the rest of the capital.

The mortgage we took out for was for five years only, and the rent we charge her is quite low, so does not cover the repayments. I am also paying an additional amount to reduce the term even more.

My wife is a stay at home mum, and I am currently employed and earn enough money to sit in the 40% tax bracket, and fill in a self assessment form.

The second house is in joint names.

I have not even thought about the tax implication of this yet, but am pretty sure there will be some.

As my wife is not currently earning, we were hoping that any income (in this case its actually a loss) could be associated to her so that it could be classed as her income.

Is this possible, or do we we have to share the income between the two of use?

As we are not currently making any money out of the house as the income is less than outgoings, does it need to be declared at all?

As the mortgage has been taken out out our own house, can it be used to offset the income or does it have to be on the house that is being rent to count?

Will my wife have to fill out a self assessment because of this?

by **Peter D** on Wed Jan 25, 2012 5:59 pm

Firstly the income/loss has to be slip 50/50. You you both inform HMRC that you are landlords and you both complete an SATR. You both declare the loss and carry it forward to use against future gains. Yes you can easch deduct 1/2 the interest on the mortgage but do ensure you have a paper trial so show the equity raised is traceable to the purchase of the B2L.
You may wish to consider having drawn up a Declaration of Trust which defines the beneficial ownership of the property so that your wife is apportioned the greater majority of the gain/loss even to 99-1. See Form 17 that your solicitor will file with HMRC. If you come to sell the property you will need the vary the Declaration at least a month prior to any exchange of contract so that the accountable gain is just greater than your £10,600 capital gain allowance. Regards Peter

by **Jaff** on Wed Jan 25, 2012 6:29 pm

Thank you for the prompt reply

You will have to excuse my ignorance in these matters,

Can you clarify what you mean by ' carry it forward to use against future gains'.

Do you mean that if we make a loss this year, it can be offset against gains in future years?

Also, form 17, Can I file this form with HMRC myself, or does it require a solicitor?

As the house was bought for my wife's sister to live in, and the end result of owning the house was to be my wife's retirement fund, are there any issues issues with declaring the share in the house 99% to my wife and 1% to myself?

The majority of the funds came from a bank account in her name, and the remainder from a joint mortgage on our own house.

As my wife is not a tax payer, and has not been for a number of years, how does she inform the tax man that she is now a landlord? Is it just a phone call?

I have read a few more articles on this matter now and could do with some clarification if possible.

When I said we are making a loss, this is only due to the mortgage payments per month being higher than the rent income. As far as tax is concerned, is it only the interest that is paid that is classed as out going, as the remainder of the payment is actually capital repayment?

by **Peter D** on Wed Jan 25, 2012 7:14 pm

Yes if you make a loss you carry it forward and use it in future years to reduce any gains.
There must be a declaration of Trust in place before you can submit Form 17. I always recommend the use of a solicitor and let him/her file the Form 17.
"The majority of the funds came from a bank account in her name" ideal but keep record. It sounds as though you are charging a very low rent. HMRC may ask questions about that. You can only claim the interest agint the rental income not an capital repayment. There are no issues regarding the % you wish to use but as I mentioned beware apon disposal that you vary the % so as to use up your CGA.
Regards Peter

by **Peter D** on Wed Jan 25, 2012 7:15 pm

Do you expect to continue to make a loss year on year ? Regards Peter

by **Jaff** on Wed Jan 25, 2012 7:38 pm

Thanks again for the responses.

If it is only the interest that can be used to calculate the profit/loss, then we are making a profit.

We are not intending to sell the property, it is to be kept as a nest egg, and at the moment my sister in law in not in a position to buy her own house, so she may well be renting the property for a few years.

To get a declaration of trust drawn up, does it have to state where the monies originally came from, as I am sole bread winner?

Do you think it may well just be a case of us both filing a SATR, and me having to pay 40% tax on 50% of the net income?

by **mullet** on Wed Jan 25, 2012 8:52 pm

Peter D wrote:You both declare the loss and carry it forward to use against future gains.

Correction (in other posts in this thread too) ... these are income losses so you carry them forward to use against future profit from property income. Such losses cannot be used against capital gains and cannot be used against other income such as from employment or self employment. I know that this point is academic now that the OP has said that property income exceeds mortgage interest so that there is in fact a profit, but I have posted in case someone else takes "against future gains" literally.

by **Peter D** on Wed Jan 25, 2012 9:00 pm

No the DofT does not address where the funds came from but keeping a record is always advised.
Yes, the losses can only be offset against future property profits, however it now appear you are making a profit.
If you do nothing then you will have to declare your half of the Rental 'profit' A Dof T and a Form 17 cost around £275 plus vat. Where abouts do you live. Regards Peter