Will CGT be affected by sharing rental income with my wife?

[TomKLondon]

I have a rental property which I have been running November 2005. Before that I lived in it as my main residence since purchase in August 2001. The mortgage deeds are currently in my name and I receive all the income.

I am considering sharing the rental income with my wife. She will be a low earner for the next 3 years. I have recently entered the 40% bracket due to my employment. The property turns over 16K p.a. and is making a good profit.

I’ve read the other forums on this topic but I can’t get a clear picture of any threats to my CGT advantages from sharing the income. I bought for 130K and estimate it is now worth around 280-300K. We plan to sell the property around November 2011. I have no other rental property and our main home is mortgaged in both our names.

If I split income 80/20 in my wife’s favour using a declaration of trust will I reduce my lettings relief and 3 year waiver of CGT? My wife never lived in the rental home like I did.

Please can anyone help with his query, your advice is greatly appreciated

Thanks

Tom K
London

[maths]

In short, not a good idea.

If you sell as proposed (no transfer to spouse) you would suffer no CGT on any capital gain made.

However, any transfer to your spouse would result in the gain attributable to her share falling chargeable to CGT with no main residence relief or letting relief for her. Her capital gain is computed based on your original purchase price not the market value at the date of the transfer to her.

You could transfer a much smaller % to her sufficient such that on the sale her gain would equal her annual exemption (£10,100) and thus no CGT on her part.

[TomKLondon]

Thanks Maths

I appreciate the advice. I thought that might be the case.

Tom

[Peter D]

I concur. The number you ahce given ledd to this :

Capital Gains Summary

Purchase Price £130,000 14/08/2001
Indexation 0.000 £130,000
Legal Fees £0
Sale Price £300,000 14/06/2011
Enhancements £0
Legal Fees £0
Gross Gain £170,000
PPR Relief £126,410 £43,590
Letting Relief £40,000 £3,590
Taper Relief 0% £3,590
CG Allow'ce 1 £10,100 -£6,510
CG Bill £0

A '-' number indicates unused allowances or releif's. I have assumed you have reported the rental income to HMRC. Note your LR has maxed out. Regards Peter

[TomKLondon]

Wow! Thanks Peter D. A very thorough answer. I have always declared the income to the Revenue and I'm glad that they in turn recognize that me renting out my old flat is not big business. When I do sell, the money will used to buy a decent family home and I'll be a landlord no more. One small correction, I will sell in November 2011 not June 2011. Will this change your calculation at all?

Thanks again

Tom

[Peter D]

Slightly as the period of ownership will increase thus the PPR apportionment will change slightly but on the vlaues yo have suggested there will be no CGT Liability and remember that costs of acquistion SDLT, legal fees and sales and legal fees are deductible form the gross gain. Regards Peter

[TomKLondon]

That's great. I think I might have forgotten those costs are deductible. Thanks Peter