Transferring beneficial interest of income

[GDHatOxon]

My wife and I have a bungalow that we intend to rent out (not HMO). We jointly own the bungalow but would like to transfer the beneficial interest from the rental income to my wife as this will be her pension. We plan to submit form 17 to HMRC Income tax declaration of beneficial interests in joint property and income to assign 100% of the income to my wife for tax purposes. We need advice on providing appropriate evidence in support of this claim. In our draft form 17 we have stated the beneficial ownership is 50% each but the beneficial income is 100% my wifes.

We would also like to know if this course of action is the best choice to reduce tax liability for the rental income, I am currently a higher rate tax payer and my wife is currently a housewife with no regular income. Is there any serious disadvantage in terms of CGT or inheritence tax that we should be aware of or any other potential difficulties that we have not considered that you are able to warn us about. Is the split of 100% income to my wife and the split of beneficial ownership 50% each the best choice to minimise the tax liability on the income and CGT.

Additional information that may help you advise us follows:

We own one property at our home address in Oxford and in the garden of that property we built a small bungalow with it's own private access from a different road. Both buildings are one plot that has one set of deeds. We have applied for and been granted a separate postal address through the local council and the post office for the additional bungalow but it is not legally separated on the deeds. It is completely separate from our own house and garden by locking wooden gates and has it's own private parking and garden.

We built the bungalow using money from my wife's unit trust investment and a small inheritance to her from her father. My wife has already applied to HMRC for a VAT refund for materials used in her name only and this has been granted. We thought this might prove useful as evidence of entitlement to beneficial interest solely to her.

Can you advise on the course of action we are planning please?

[maths]

I would suggest that the property (i.e. the house plus bungalow) for income tax and CGT purposes comprises a single property owned beneficially 50/50.

Any rental income is automatically split 50/50 as a consequence.

Wrt to husband and wife it is not possible to carve out 100% of the rental income for wife whilst the property remains owned 50/50.

The only way wife can for income tax purposes be subject to income tax on 100% of the rents is if she owns 100% of the property.

[Ian McTernan CTA]

You need to carve out a separate title for the bungalow, get a solicitor to do this. The title could be in your wife's sole name.

Transfers between spouses are exempt from CGT, so that tax won't be a problem. Not sure whether Stamp Duty would be applicable, would need a stamp duty expert to confirm whether there is a value for SDLT purposes.

Bear in mind the bungalow is unlikely to be part of your PPR and so on any future sale will be subject to CGT, so make sure you establish a base cost.

You may also wish to consider altering your Wills at the same time to reflect the differences in Estates.