Husband/Wife - Reducing income tax due on rent


Husband/Wife - Reducing income tax due on rent

Postby ukdave8283 on Wed Aug 24, 2011 6:46 am

Good morning. I hope you can help me with my tax situation, and please accept my apologies if this has been answered elsewhere. Here's some background:

Myself and my wife jointly own the property we live in (property A). We have paid off all the mortgage on this property, but are about to jointly take a small mortgage out on it to purchase a second smaller property (property B) with the intention of letting it to a tenant. My salary pushes me into the 40% tax bracket, whereas my wife earns very little.

Firstly, I would like to avoid as much income tax on the rent as possible. I have read elsewhere that if we purchase the buy to let on a 50% husband 50% wife ownership, then the income we receive as rent will be apportioned by the same percentage and income tax paid accordingly. I presume that if I wanted a larger share of the income tax due on the rent to be paid for by my wife, I would have to purchase the property with say Husband 1% ownership 99% wife ownership. If this is the case then it makes good sense to do this as we would pay less income tax on the rent. But in the unlikely event that we were to divorce, wouldn't this place me in a vunerable position having signed off 99% of the property to my wife and me only having a 1% share? Is this the best way for me to reduce paying the 40% tax rate on my share, or is there a better option?

Many thanks for your help.

Dave.
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Re: Husband/Wife - Reducing income tax due on rent

Postby Peter D on Wed Aug 24, 2011 7:49 am

You could own the property as Tennant's in common in what ever proportion you wish. However you could own it as joint owners so HMRC would by default treat the rental income/profit as 50/50. However Legal ownership and Beneficial ownership as separate entities and Declaration of Trust can apportion the Beneficial ownership as you wish form 1 to 99% or 99 to 1%. You inform HMRC via a Form 17. Best to engage a solicitor to do this for you. Should you dispose of the property in the future you alter the Declaration of Trust to apportion a percentage of the property so the resulting can for you is covered my your Capital gains Allowance, presently £10,600. You have to do this prior to any exchange of contracts.

Ensure that the purpose of raising the equity is disclosed to the provider and the funds are fully traceable to the purchase of the B2L to ensure the interest is deductible from the rental income. Regards Peter
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Re: Husband/Wife - Reducing income tax due on rent

Postby metalfish on Wed Sep 28, 2011 2:36 pm

I'm trying to do something similar to ukdave8283 but the advice given by Peter D seems to be at odds with some other information I've seen on this site.

This article : http://www.taxationweb.co.uk/tax-articles/property-taxes/the-principles-and-implications-of-joint-tenancy-and-tenancy-in-common-for-spouses.html indicates the following (i've underlined the critical part):

"Where the spouses do not wish to be subject to income tax on an assumed 50:50 split, they can make a declaration of their respective beneficial interests in the income and the property from which the income arises, provided that the beneficial interests of the spouses in the property correspond to their beneficial interests in the income. Thus, in the above example, the spouses could make a declaration under which the rental income is to be split 75:25 in line with their respective ownership proportions. However, it is important that the ownership proportions reflect reality i.e., if the above declaration is to be made then the spouses must own the property 75:25 which would mean ownership as tenants in common.

It is not possible for the declaration to decree that the income from the property is to be shared between the spouses in a different proportion to that of the ownership. (For example, the declaration in the above example cannot specify a property split of, say, 80:20 to reflect the ownership of the property with an income split of, say, 60:40). "

This seems a different interpretation to what Peter D is saying: "However you could own it as joint owners so HMRC would by default treat the rental income/profit as 50/50. However Legal ownership and Beneficial ownership as separate entities and Declaration of Trust can apportion the Beneficial ownership as you wish form 1 to 99% or 99 to 1%. You inform HMRC via a Form 17."

So what is the answer here?

Is it possible for myself and my wife to be tenants in common owning 50% each of the property, but for any rental income to be split 99%:1% with the majority to going to my wife?

How do I go about doing this? The declaration of trust aspect is not clear to me - what does this need to declare exactly and is this sufficient to avoid any issues with HMRC without having a rental income split aligned with the actual property ownership?

Interestingly enough I've contacted 6 accountants about this in the last 2 days: 4 had no idea about how to deal with it, one said it was at all not possible to do the 50:50 to 99:1 apportionment and one indicated that all I need to do is draft a letter between my wife and I and there is no need for a declaration of trust. There is a distinct confusion out there about the rules and subsequent implementation.

Any clarification would be appreciated.

Thank you
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Re: Husband/Wife - Reducing income tax due on rent

Postby Incredulum on Wed Sep 28, 2011 2:47 pm

metalfish wrote:Is it possible for myself and my wife to be tenants in common owning 50% each of the property, but for any rental income to be split 99%:1% with the majority to going to my wife?


Both Peter D and what you state agree.

It is not possible for you to own 50% each of the property but to split rental income 99:1.

Is IS possible for you to own the property 50:50 tenants in common and THEN to use a declaration of trust so that your W owns the property 99% and has a right to the rental income 99%.


(If you were not married then it would be possible to own it 50:50 but agree to share the rents 99:1. As you are married this is not possible - but that's fine as you can make an actual transfer tax free. As an administrative simplification it is easiest not to bother changing the ownership registered at the land registry (the legal ownership) but "merely" to use a declaration of trust which states effectively "I continue to hold the legal ownership, but the beneficial ownership is that of my wife." You are right, it is widely misunderstood.)

Go and get a solicitor who understands tax to draft this for you - maybe two to five hundred pounds.
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Re: Husband/Wife - Reducing income tax due on rent

Postby section 44 on Wed Sep 28, 2011 2:58 pm

Incredulum wrote:It is not possible for you to own 50% each of the property but to split rental income 99:1.


Why?

Beneficial entitlement to income and capital can be different.
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Re: Husband/Wife - Reducing income tax due on rent

Postby Peter D on Wed Sep 28, 2011 5:21 pm

But the owners are joint not T In C, or have I misse something. So a 'Declaration of Trust' is effective to apportion the Rental income. Regards Peter
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Re: Husband/Wife - Reducing income tax due on rent

Postby maths on Wed Sep 28, 2011 7:57 pm

Assume a BTL is to be purchased.

The legal title may be in the name of one spouse or both spouses.

Normally, but no necessarily, the latter.

As a married couple with the property in joint names (ie legal title in joint names) any rents are split 50/50 automatically. However, if on purchase the beneficial interests are held other than 50/50 (eg 60/40; 70/30 etc) the rents are still automatically split 50/50 unless an election on Form 17 is filed under which the rent split must be the same as the beneficial ownership split.

Thus, it is not possible on the above assumptions to split beneficial ownership differently to rent split.

If one spouse is a higher taxpayer and the other a non-taxpayer and it is desired to split rents say 1/99% this, on the above assumptions, requires beneficial interests to be held 1/99%; any initial beneficial ownership split (eg 60/40%) can be subsequently changed (to say 1/99%) enabling the rent split to also change.
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Re: Husband/Wife - Reducing income tax due on rent

Postby metalfish on Thu Sep 29, 2011 9:43 am

Thanks to all for your responses to my query. It does make matters clearer - there seems to be a lot of confusing and possibly contradicting information available on this (to a non-Accountant layman like me anyway).

So I think I need to undertake the following definitive steps:

1 - Have the property owned as Tenants in Common (split 50:50).
2 - Have a Declaration Of Trust established by a Solicitor that says although we own the property 50:50 the rental income/expenses/profit will be apportioned 99:1. (Is there standardised wording for this? Can anyone recommend a Solicitor they have dealt with on such matters as my Conveyancer doesn't have a clue?)
3 - Complete Form 17 to declare the uneven split of interest in the property.

Is this all correct, or am I missing something?

I'd really appreciate if someone could recommend a Solicitor that has dealt with similar matters, or can indicate where to find some boilerplate text for a Declaration of Trust that I may pass to my Conveyancer.

Thanks again.
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Re: Husband/Wife - Reducing income tax due on rent

Postby Incredulum on Thu Sep 29, 2011 11:04 am

2 - Have a Declaration Of Trust established by a Solicitor that says although you own 50% of the property, you hold 49% on trust for your wife. (So that your wife holds 99% of both the income and the capital.)


If at the time when you come to sell it suits for you to own more of it for CGT purposes, then you can amend it at that stage.
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Re: Husband/Wife - Reducing income tax due on rent

Postby maths on Thu Sep 29, 2011 11:36 am

You appear to have misunderstood the position.

If legal title is held in joint names (which is normal) the rental income split must follow the beneficial ownership split.

Tenants in common held 50/50 means rents split 50/50; you cannot hold as tenants in common 50/50 and yet split rents say 99/1.

You can hold 99/1 and then rents will be split 99/1.
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