This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

Renting out property and renting elsewhere - ownership and tax question

SArb
Posts: 1
Joined: Wed May 03, 2017 5:17 pm

Renting out property and renting elsewhere - ownership and tax question

Postby SArb » Wed May 03, 2017 5:33 pm

Hi all

My wife, daughter and I all live in a property in London which I own (with a current mortgage balance of ~£360k). We are looking at moving for my new job in the West Midlands, initially renting out our current flat and renting another property elsewhere before eventually buying once things have settled down.

I am a 40% tax payer while my wife is a non-payer. Everything relating to the property is in my name only (we were married at the time of purchase but we used my income only on the mortgage). We'd clearly prefer as much of the rental income as possible to go to her in order to minimise the tax bill and allow us to rent somewhere comparable elsewhere. Would love some advice on the options available to us (if any!). Do I need to transfer ownership of the property to joint ownership (or indeed her sole ownership) to give her a share of the rental income? If so, would there be stamp duty payable, and if so how much?

Any thoughts or advice hugely appreciated - thank you!

GlobalTaxAdviser
Posts: 633
Joined: Fri Dec 05, 2014 1:18 am

Re: Renting out property and renting elsewhere - ownership and tax question

Postby GlobalTaxAdviser » Wed May 03, 2017 6:05 pm

Hi

I would change the beneficial ownership of the property through a declaration of trust so you wife would have the majority ownership of the property.

That should result in a significant saving

Kind Regards

GTA

GlobalTaxAdviser
Posts: 633
Joined: Fri Dec 05, 2014 1:18 am

Re: Renting out property and renting elsewhere - ownership and tax question

Postby GlobalTaxAdviser » Wed May 03, 2017 6:16 pm

Sorry a couple of other points since the mortgage may not be in the name of your wife then she will not be able to take the deduction for mortgage interest in her tax return

If you transfer legal ownership to your wife then there will be stamp duty on the mortgage plus you may lose 50% of Private Residence Relief.

someone
Posts: 381
Joined: Mon Feb 13, 2017 10:09 am

Re: Renting out property and renting elsewhere - ownership and tax question

Postby someone » Wed May 03, 2017 7:08 pm

If I understand correctly, it was suggested in another recent thread that if the beneficial interest in the property is split but one person remains liable for the mortgage then provided the person who has the mortgage gets enough income then they could claim for all the mortgage interest.

I'm not at all comfortable with this idea when it's a husband and wife (but I'm no expert)

In particular, I'd assume that the mortgage would have to be smaller than the share held by the mortgage holder.

I'd be more inclined to give a small share to the spouse and put them on the legal title (and mortgage). Provided the proportionate share of the mortgage is less than 40K there should be no stamp duty but then the net income can be split 50/50. (If no other properties owned then possibly 125k but I wonder whether giving a spouse a share of the only owned property for consideration might trigger the additional rate SDLT)

It's an interesting topic that I expect to find myself dealing with in the future so I shall be interested to see responses.

someone
Posts: 381
Joined: Mon Feb 13, 2017 10:09 am

Re: Renting out property and renting elsewhere - ownership and tax question

Postby someone » Wed May 03, 2017 7:18 pm

https://www.gov.uk/guidance/sdlt-transf ... r-property

Example
A husband decides to transfer a half share in a property he owns to his wife. He doesn’t take a cash payment for this share, but there’s an outstanding mortgage on the property. The amount outstanding is more than the current threshold, so SDLT is payable, even if the husband keeps the mortgage. He must tell HMRC about the transaction.

That seems to indicate that you can't transfer a share of the property without causing a chargable consideration if there's a mortgage.

section 44
Posts: 4468
Joined: Thu Oct 30, 2008 12:47 pm

Re: Renting out property and renting elsewhere - ownership and tax question

Postby section 44 » Thu May 04, 2017 9:13 am

it was suggested in another recent thread that if the beneficial interest in the property is split but one person remains liable for the mortgage then provided the person who has the mortgage gets enough income then they could claim for all the mortgage interest.
Sharing profits rather than income (as per HMRC guidance - I suspect that when HMRC refer to joint ownership they actually mean co-ownership):

"Joint ownership

You can share ownership of rental property with other people but how the rental income is taxed will depend on your share of the property.

Property jointly owned with spouse or civil partner

Property jointly owned by married couples and civil partners who live together will be taxed in equal shares, unless you decide to split ownership differently.

If you own the property in different shares, you can use a different split. If you own the property in unequal shares, and are entitled to the income in the same unequal shares, the income can be taxed on that basis. You both need to notify HMRC.

Property jointly owned but not with a spouse or civil partner

If you own a property jointly with another person who isn’t your spouse or civil partner your share of the rental profits or losses will usually be based on the share of the property you own."

https://www.gov.uk/guidance/income-tax- ... -ownership

maths
Posts: 7553
Joined: Wed Aug 06, 2008 3:25 pm

Re: Renting out property and renting elsewhere - ownership and tax question

Postby maths » Thu May 04, 2017 3:55 pm

Care needs to be taken when reference to "joint ownership" is made whether by HMRC or others.

This could be a reference to joint legal ownership and/or joint beneficial ownership depending upon context.

Assume husband (H) possesses sole legal title and sole beneficial ownership of a mortgaged property who decides to transfer, say, 40% of the beneficial ownership to wife (W) whilst H retains sole legal title.

This transfer would typically be effected by H executing a simple declaration of trust (DoT) under which H would simply declare that he henceforth held the legal title on trust for H and W as to 60/40%. With respect to the discharge of any mortgage payments this is a matter between H and W. Thus, for example, H may state in the DoT that W will not take on any liability for such repayments. In which case no SDLT arises on the part of W. Alternatively, it may be stated in the DoT that W may take on (in the current example) 40% of the mortgage; in which, case an SDLT charge arises.

If the property is a rental property then (at least in my view) W will not be able to obtain any deduction for income tax purposes for any mortgage interest discharged; others may disagree. Whether H is able to continue to obtain a deduction for the full amount of interest may, it seems to me, to be arguable. H certainly has a legitimate liability incurred for the purpose of the property business (at least when originally taken out). However, should H turn a profit into a loss due the DoT then HMRC I suspect would seek to possibly argue that H had ceased to carry out the business on a commercial basis or invoke GAAR?

Just some thoughts.

someone
Posts: 381
Joined: Mon Feb 13, 2017 10:09 am

Re: Renting out property and renting elsewhere - ownership and tax question

Postby someone » Thu May 04, 2017 7:21 pm

Thanks. I've now gone and (hopefully) found the relevant bit of legislation related to debt as consideration.

http://www.legislation.gov.uk/ukpga/200 ... tion-301-3

The problem is that I don't know if it agrees with you or says that you always trigger SDLT consideration:

(3)In paragraph 8 (debt as consideration), after sub-paragraph (1) insert—

“(1A)Where—

(a)debt is secured on the subject-matter of a land transaction immediately before and immediately after the transaction, and

(b)the rights or liabilities in relation to that debt of any party to the transaction are changed as a result of or in connection with the transaction,

then for the purposes of this paragraph there is an assumption of that debt by the purchaser, and that assumption of debt constitutes chargeable consideration for the transaction.
(1B)Where in a case in which sub-paragraph (1)(b) applies—

(a)the debt assumed is or includes debt secured on the property forming the subject-matter of the transaction, and

(b)immediately before the transaction there were two or more persons each holding an undivided share of that property, or there are two or more such persons immediately afterwards,

the amount of secured debt assumed shall be determined as if the amount of that debt owed by each of those persons at a given time were the proportion of it corresponding to his undivided share of the property at that time.


I'm not sure if 1B says:

in the case that (1)(b) applies then the amount of debt is a proportion of the total debt (So where the same person retains 100% liability there is no consideration)
or
(1)(b) applies where there's a change in the proportions of ownership and, therefore, the proportions of debt as assessed for SDLT.

It works when legal title is held in joint names, transferring a share of the property transfers a share of the mortgage debt (not withstanding any agreement otherwise) but isn't clear when the property (and mortgage) is in a single name.

As one example of where it doesn't seem fair:

Two people, (A) cash rich but income poor and (B) income rich but capital poor decide to pool their resources to buy a rental property 50/50

One solution:
Property is bought in B's name only. B has mortgage and A puts in 50% of purchase price. Via declaration of trust A is entitled to 50% of the capital value of the property should it be sold and B must discharge the mortgage from his share and B is solely responsible for paying the mortgage. B will have a debt to A should his share not be sufficient to pay off the mortgage in the event that the property is sold. A is entitled to 50% of the rental receipts before any deductions for mortgage interest.
A later gives his share to C. Is there any SDLT due? I would say no, A was never liable for the mortgage and (1)(b) would seem to suggest that the liabilities didn't change. (1B) if it applies would say that SDLT is due.

Another solution:
Property is bought in joint names as tenants in common. As above, similar DoT. A gives his share to C. It would appear from the above legislation that irrespective of the DoT, C is assuming an additional mortgage liability and so will have to pay SDLT.

Indeed, A giving his share to B would also appear to trigger SDLT.

In the joint names case I think C does acquire a liability and A loses one. Should the property in its entirety be insufficient to discharge the mortgage then the mortgage company will be able to pursue C. The probability of that event happening might be tiny but it's not zero.

maths
Posts: 7553
Joined: Wed Aug 06, 2008 3:25 pm

Re: Renting out property and renting elsewhere - ownership and tax question

Postby maths » Thu May 04, 2017 11:20 pm

Property is bought in B's name only. B has mortgage and A puts in 50% of purchase price. Via declaration of trust A is entitled to 50% of the capital value of the property should it be sold and B must discharge the mortgage from his share and B is solely responsible for paying the mortgage. B will have a debt to A should his share not be sufficient to pay off the mortgage in the event that the property is sold. A is entitled to 50% of the rental receipts before any deductions for mortgage interest.
A later gives his share to C. Is there any SDLT due? I would say no, A was never liable for the mortgage and (1)(b) would seem to suggest that the liabilities didn't change. (1B) if it applies would say that SDLT is due.
No SDLT arises on the gift by A of A's beneficial interest in the property to C. C's acquisition (by way of gift) involves no consideration, C assuming no liability with respect to the mortgage (which is exclusively a liability of B).
Property is bought in joint names as tenants in common. As above, similar DoT. A gives his share to C. It would appear from the above legislation that irrespective of the DoT, C is assuming an additional mortgage liability and so will have to pay SDLT.

Indeed, A giving his share to B would also appear to trigger SDLT.

In the joint names case I think C does acquire a liability and A loses one. Should the property in its entirety be insufficient to discharge the mortgage then the mortgage company will be able to pursue C. The probability of that event happening might be tiny but it's not zero.
As the property is bought in joint names (ie A and B appear on the legal title) then both vis a vis the mortgagee are liable for the whole mortgage (severally and jointly). However, following on from the above scenario, only B needed the mortgage as A contributed their 50% in cash form. Thus, B agrees as between B and A that B will indemnify A should A find himself having to contribute to any repayment of the mortgage. This indemnification as between B and A has no relevance to the mortgagee. A gifts his beneficial share to C. If this also involves A releasing himself from the legal title and thus from the mortgage liability as between A and the mortgagee, the mortgagee would require C to then become part of the mortgage agreement with B. This would precipitate an SDLT charge on C (whether B agrees to indemnify C as he had with A or not). Alternatively, A simply gifts his beneficial interest to C but A remains on the legal title with B. C is not on the legal title and hence has no direct liability to the mortgagee; A agrees to indemnify C ie C takes on no part of A's liability and hence C is not subject to any SDLT charge.


Return to “Property Taxation”