We were wanting to put the rental property into both our names (which presumably would constitute a new letting business) and we wondered if we could do this by transferring it to us both for a consideration of £125k so below the sdlt threshold and use the new mortgage advance for this purpose. The idea being that we would then be able to deduct the interest element of the repayments on £125k for the rental income (as at present my husband pays about £1500 a year in tax on the rental income). In reality my husband would then put the £125k received for the rental property straight into the funds required to buy our new house. This would all happen on the same day.
There is a worrying circularity here. A basic principle of the taxation system is that you cannot pay yourself for something, such as an asset or for services rendered. So for instance you cannot buy your own asset from yourself. And you cannot carry out work on your own rental property, pay yourself money for doing so, claim that money as a deduction from rental income and then declare it as personal income.
That all this is planned to happen on the same day is the most telling point. Your rental property does not have a mortgage, so there is no mortgage interest which is deductible against the property income. The property is already "in your property letting business", and interest is only deductible to the extent that it relates to borrowings up to the value of the asset at the time that it enters the property letting business.
We were wanting to put the rental property into both our names (which presumably would constitute a new letting business)
I doubt it. Property letting partnerships are not automatically created simply because more than one person owns a let property - what you will probably have is simply a jointly owned asset by husband and wife. Read the HMRC guidance on property partnerships which is here: http://www.hmrc.gov.uk/manuals/pimmanual/PIM1030.htm
One relevant quote: "Whether or not a taxpayer is a member of a partnership depends on the facts. A partnership is unlikely to exist where the taxpayer is one of a group of joint owners who merely let a property that they jointly own."