renting property and transfers to spouse

[ruudboy]

I am married. I am a higher rate tax payer. My wife is a lower rate tax payer.

My wife has a home in her sole name - this property is currently let out. We are currently living in a property that is in my sole name.

We are planning to buy a new property.

We plan to sell my wife's property in a few months, primarily because (a) it is leasehold and unexpired portion is around 85 years and (b) I understand that she would not pay CGT on any sale within three years of our wedding, even though she has not/will not have lived there subsequent to our wedding date.

We plan to rent out my property (Property B). I assume that as we will be living in a new home (Property C), the Rent a Room income tax relief/scheme would not therefore apply?

The current mortgage on Property B is an interest only mortgage. I understand that it may be possible to offset the mortgage payments of this interest only mortgage against the rental income? Would I be able to do the same even if Rent a Room was not applicable?

I was actually considering converting the interest only mortgage on Property B to a repayment mortgage. Would a repayment mortgage entail that all rental income received on this property would be subject to income tax (save for any gas and electricity, insurance premiums for buildings and contents, water, letting agent fees and council tax)?

My wife is likely to stop working and cease to have any income in about one year. If income tax is chargeable on the rent that I receive in respect of Property B, would it be worthwhile transferring this property to her sole name, so tax would be payable at the lower tax rate (with a fair bit probably at zero and then 10% before hitting the lower tax rate)?

Am I right in believing that this transfer, like any other transfer between spouses, would not attract CGT? Would this transfer of itself require stamp duty to be paid?

[Huw Williams]

You have asked a lot of questions and I hope a few brief responses will help:

a) interest relief is available providing the loan was taken out to purchase the rental property. Relief is available on the interest whatever style of loan (repayment, interest only...) is involved.

b) it certainly makes sense for your wife to earn any rental profits if she pays tax at the lower rate.

c) transfers of assets between spouse are generally free of capital gains tax and inheritance tax (but beware if one of you is not UK domiciled).

d) stamp duty does not apply to gifts.

e) principal private residence relief from capital gains tax is available for the last 36 months ownership of a property which has been your main home.

I have only touched on the subjects raised.

Trying to answer everything in depth would, I think, require a meeting to go through everything in detail and come up with an appropriate plan of action to take account of all your circumstances.

Huw Williams
enquiries@huwwilliams.co.uk