Change in beneficial ownership

[AGoodman]

No, your wife could only declare the part of the mortgage interest relating to the part of the property she has retained and in any case the relief would be limited to the rent she receives (ie 1%).

[maths]

Not sure I agree with AGoodman's last post.

There is nothing to prevent a married couple agreeing to split gross income and expenses in different proportions.

For example, in the current case the wife could transfer a 10% beneficial interest (giving rise to a 10% share of gross rents) under a declaration of trust and also confirm a split of expenses 95% herself and 5% husband.

The only issue would be if the transfer led to one of the parties generating a loss in which case it is likely HMRC would challenge any tax relief for the loss (eg as would no doubt apply where a 1% beneficial interest was transferred together with a responsibility for 100% of the mortgage interest, which as it happens would not be deductible anyway if husband not a party to the mortgage).

[prudence01]

Thanks for the input guys.

The only issue would be if the transfer led to one of the parties generating a loss in which case it is likely HMRC would challenge any tax relief for the loss .

So hopefully it follows that if (for example) the transferor retains 20% beneficial interest and therefore declares 20% of the rental income, which exactly offsets the 100% of mortgage interest payments, there would be nil tax liability.

The transferee i.e. me, then declares and pays income tax based on the remaining 80% of the rental income?

[bd6759]

I disagree. In order to determine the amount of loan interest that would be allowable we would need to see the original capital account. That will comprise of the value of the property when it was first used for letting and the value of the liabilities at that time. That will determine how much capital the wife can withdraw from the business (i.e. gift to her husband) without affecting her claim for loan interest relief.

[maths]

bd6759

Am not sure if you're disagreeing with my statement:

For example, in the current case the wife could transfer a 10% beneficial interest (giving rise to a 10% share of gross rents) under a declaration of trust and also confirm a split of expenses 95% herself and 5% husband.

[bd6759]

I don't see how it could be argued that 95% of the expenses were incurred wholly and exclusively for the purpose of earning 10% of the rents.

[maths]

For example, in the current case the wife could transfer a 10% beneficial interest (giving rise to a 10% share of gross rents) under a declaration of trust and also confirm a split of expenses 95% herself and 5% husband.

Wife owns 100% initially. She transfers 10% beneficial interest to husband and husband only to bear 5% expenses (not 95%).

Where H and W each possess a beneficial interest in a property and, say, the roof needs repairing at a cost of 100 then the incurring of that 100 has been wholly and exclusively incurred and hence is deductible. The issue is then how much does each of H and W deduct; each deducts the proportion they each incur as per any agreement between the two of them.

I think the issue is not whether the expense has been wholly and exclusively incurred (which it clearly has) but whether on other grounds HMRC could deny all or some part of the expense for H and/or W. As I indicated I suspect if the rental income for H is, say, 1% but his share of the expenses is 99%, say, (taking extremes) then it would seem strongly arguable that H was not carrying on a property business (which I suggest implicitly assumes that it is being carried on with some view to profit).