Best option to transfer income to spouse

[Racheee]

We are lucky enough to keep a property that was once my husband’s main residence for 9 years. He is the sole legal owner and I have never lived in the property. Since mid 2016, the property has been rented out and the income declared on my husband’s tax return. He is a higher rate tax payer, while I am paying tax at basic rate.

We are looking at possible options to migrate this rental income to myself, so it would be taxed at my basic rate, but also retaining the 9 years PPR. From researching online and reading through the many forum’s highlighting this issue, I have concluded there are 2 possible options.

Option 1
To hold the property as tenants in common. Submit form 17 along with the delaration of trust to HMRC to split the beneficial ownership - 1% to my husband, 99% to myself. Any rental income is taxed according to this split. Before sale of property, we will submit another form 17 and declaration of trust to reverse the beneficial ownership. So my husband can retain 99% of the 9 years PPR against the gain.

Option 2
Legal title remains with my husband. We enter into a declaration of trust under which he transfers 99% of the beneficial interest to me, therefore he owns 1% and I own 99%. Any rental income is taxed according to this split. Prior to sale, my 99% interest will be transferred back to my husband, so he is able to use the full 9 years PPR against the gain.

For option 2, can we create this type of declaration of trust by ourselves and do we need to submit it to HMRC?

I want to know which option is viable and most importantly have I missed out any points that would be a deal breaker.

I will be most grateful for any advice on this matter.

Kind regards,
Rachael

[jerome.lane]

Both options could be challenged by HMRC; option one is the more robust one. If there is finance on the property, this could cause a SDLT issue. If you manage the property, then a partnership arrangement may be a suitable alternative that could lead to further beneficial tax planning given the new PPR and letting relief rules coming into effect from next April. Please do contact me directly if you want specific advice on this.