Taxable Liability from Rent

[Al70]

I have a flat which I have owned for just over 5 years and is solely in my name. I have an off-set mortgage on it.
My wife of 4 years and I lived in this flat from time of purchase until the end of February this year.
We now live in a house we have bought in both our names and rent the flat out. I earn in the 40% tax bracket and my wife is under it.

Questions:
1. My monthly mortgage statements show how much interest I have saved due to the off-set. Will the tax department except this to be added on to the interest actually paid as the full allowable tax deductible interest?

2. If not then I assume I should clear all my funds out of the off-set accounts and invest elsewhere, to maximise the tax deductible interest? i.e. ISA

3. As the flat is only in my name can I still use my wifeÂ’s tax liability for half of the rent profit? (If we were to get divorced the courts would adjudge that she is entitled to half of it).

4. We are currently persuing a lease extension on the flat, I assume that this is also a legitimate tax deductible expense?

Thanks in advance Al.

[Peter D]

As you were the sole owner then it is your income not your wife's. Simple you think, I'll add my wife as the majority owner via an interspousal transfer on a no loss no gain basis. However lets say you retain a 10% share and therefore via Form 17 within 60 days, 90% of the income in your wife's name unfortunately you would loose 90% of your PPR exemption, Read IR283 on the HMRC web site and 90% of any letting relief which is you are going to keep the property rented out long term say 8 to 10 years could be worth up to £40,000. So until your understand these inter-reactions I suggest you do nothing.

Regards Peter

[section 44]

Q1 - No, you haven't incurred any interest.

Q2 - This isn't a tax question and it would depend on the difference in interest rates (taking into account any tax deductibility).

Q3 - The courts may reach that decision but in equity not law. Legally your wife only 'owns' half of it if she has funded half of it such that you are effectively holding the title as nominee for both of you.

Q4 - Probably.