Passing Ownership to Wife: PRR relief and CGT implications

[KarenF]

Hello all,

Situation is this:

Husband is high-rate tax payer. Sole owner of property. Bought mid-1999, lived in to mid-2005. Rented out since. Mortgage nearly paid off. 10K+ rental income p.a.

Wife has very little income (under personal allowance). Lived in the property also 99-05.

If the property is transferred to the wife, to save tax in rental income, will the PRR relief and additional allowances be lost when selling?

[Peter D]

Yes PRR and Letting Relief will be lost. I would need some numbers to advise further. It may be possible to use a Declaration of Trust to apportion the beneficial ownership thus the renatal income, then prior to any disposal transfer the BO back so all the PRR and LR can be claimed. Regards Peter

[mullet]

The problem you face is that private residence relief arises on the basis of the property being the owner's only or main residence during the (owner's) period of ownership. And lettings relief is available (if qualifying conditions are met) only if private residence relief arises on that disposal.

[KarenF]

Thanks Peter and Mullet, that is very helpful.

The figures are quite simple. Bought for 77,000, cost of buying, 1,200, heating system changed 3,800, so total 81,000
Value in 2005, when move out (if you need this): 157,000
Value in 2012 (if we sell up now): 182,000, minus selling costs of say 1,000, so 181,000. Exactly 100,000 profit.
Lived in for six years and 2 months, rented out for say 7 years later this year.

We are not that keen to sell, but paying 40% of 10K rent is not worth it. If apportioning works (say 90-10 to wife) and one can reapportion back before sale (say 90-10 to husband), that is ideal. Can one reapportion immediately before a sale, or does one need to have a period (like a full tax year) of reapportionment before HMRC
will allow the reliefs?

[KarenF]

Forgot to ask: Do we need a solicitor for this. And can this be done only if the mortgage is paid fully off?

Thanks for all input. You seem to know more than the average accountant.

[Peter D]

The CH boiler was not a capital item and if it was changed during the let period it should have been offset against the rental income.
I you sold it now there would be no CGT as PPR and Letting Relief would apply. Read HS283 on the HMRC web site.
If you property was transfered to the spouse the CGT bill would be a minimum of £22,652.
A DofT could be used to apporion the beneficial ownership in favour of your spouse say 99 to 1 and Form 17 submitted to HMRC. Then, say 2 months, prior to any exchange of contract the beneficial owners is changed back. However if a share is retained that reflect a gain equal to the CG Allowance then you would get 2 sets of CGA but remember she does not get any PPR or LR on that share so you need to run the numbers at the time. At present he has used £30,000 of the max £40,000 LR.
I do not consider this a DIY excercise and you should engage a solicitor that knows what he is doing and he should forward the Form 17 to HMRC and the second one prior to selling. The mortgage does not enter or need changing for this to be valid.
Regards Peter

[KarenF]

Dear Peter, Thanks for this. I spoke to a solicitor. Re: your last sentence, I am informed that in fact the mortgage lenders consent is required before any transfer of equity happens, then you add the trust deed later.

[Peter D]

The mortgage company is only involved if your solicitor insists on severing the sole ownership. A Declaration of Trust defining Beneficial ownership has nothing to do with a mortgage. Yes you can change it prior to sale I aways insist it is done at least 1 whole month prior to any 'exchange the contract' which is the important date.

There are Solicitors that contribute to this forum so await other opinions ro re-assure you.

Regards Peter

[KarenF]

Hello,

Peter are you suggesting that going the route of changing the title register (adding the spouse), then doing the trust deed is not necessary, and one can do a trust deed directly? Would that not obviously be a suspect practice as the spouse really would not appear anywhere except on a deed trust, which could be altered all the time without any trail.

[Peter D]

If you change the title deed then the mortgage company would be involved. A Declaration of Trust does not require any change to the title or the mortgage. There is a trial as you have to supply a Form 17 to HMRC to apportion the beneficial ownership and any subsequent changes. I made no comment regarding "transfer of equity happens" Regards Peter