How to reduce tax on rental income

neetugopal · 16 February 2007 at 6:33PM

I own a property which I currently rent out. There is no mortgage outstanding on it. It was our main residence between Dec. 2000 and July 2006. We (myself, wife-married for 7 yrs, and a daugther) moved to a bigger in July 2006 and have mortgage on it. The rented property is in my name. I am basic rate tax payer and my wife does not work.

Rental income from property is around £4500 per annum and currently worth
£85,000. What would be the best way to reduce tax on the rental income?

1. Transfer property in my wife's name and use her tax free allowance.

2. Remortage the rented property and offset mortgage intest against rental
income.

I am tempted to go for option 1 as it does not involve taking mortgage and
bearing any associated fees. My only concern to go for option 1 is that whethermy wife will be able to claim Private Residential Relief as she did not own the property, even though she lived all the time, when it was our main residence.

PeteMc · 16 February 2007 at 6:44PM

I looked into this scenario (1) when commencing rental of my property.

The advice loud and clear was don't do it. I was told that HMRC will judge that it's been done to evade tax. It used to be OK as an avoidance method but tax regs were changed some time ago.

Nonetheless, I'm not a tax expert and you need to get professional advice if you embark on this method.

silvercar · 16 February 2007 at 10:06PM

one of the purposes of the mortgage you took out in July 1996 was to retain your existing property to use as a BTL rather than sell it. As such the mortgage interest you pay on your current home, upto the value of the let property at the time you started letting it, is allowable against rental income.

it is the purpose of the loan, not where it is secured that counts. If you didn't have your rental property you would now be able to have a much smaller mortgage.

Mine's a pint!

neetugopal · 17 February 2007 at 9:46AM

Thanks Silvercar. Two pints on the way!! :beer:

I did not think that it was possible to offset mortgage interest on our new home against rental income. If I can offset mortgage interest then I might be able to offset legal cost and mortgage arrange fees paid on the new house :-)

vinecote · 17 February 2007 at 10:34AM

if you rent a property 10% of the rental income can be off setted as wear and tear.
if you provided furniture in the property you can also offset this.
calculate the value of the furniture and depreciate this at 25% until its value is nil.
if you improve the house then offset this as well.

Hoddie_2 · 17 February 2007 at 10:40AM

if you improve the house then offset this as well.

It's not as simple as that. Installation of a new kitchen for instance is not an allowable expense, though the cost may later reduce any capital gains tax.

Ian_W · 17 February 2007 at 11:46AM

vinecote wrote:

if you rent a property 10% of the rental income can be off setted as wear and tear.
if you provided furniture in the property you can also offset this.
calculate the value of the furniture and depreciate this at 25% until its value is nil.
if you improve the house then offset this as well.

That's a bit mixed up I think.
IIRC you can claim capital allowances, ie depreciation, only if the property is a Furnished Holiday Let. For a normal BTL which is furnished you can claim EITHER a ware & tear allowance which is 10% of rental income OR furniture replacement costs on an "as and when" required basis. Once you decide which to claim you can't alternate on a year by year basis to suit your circs.

maypole · 17 February 2007 at 12:39PM

We own a rental property and changed it from joint names to my name only as I am a none tax payer. The solicitor didn't mention anything about tax evasion to us! As far as I know, you can transfer between husband and wife as long as no money changes hands. That was about 7 years ago I think.

BrianM1975 · 17 February 2007 at 1:22PM

maypole wrote:

We own a rental property and changed it from joint names to my name only as I am a none tax payer. The solicitor didn't mention anything about tax evasion to us! As far as I know, you can transfer between husband and wife as long as no money changes hands. That was about 7 years ago I think.

You should be careful as the settlements legislation may apply to the transfer of the house i.e. the Inland Revenue ignore the legal position and keep the income as 50:50 and thus you will not save the tax you thought you could.

I'm an accountant and have seen this go wrong in a similar situation to yours (but that requires an official Inland Revenue enquiry in to your affairs).

Hoddie_2 · 17 February 2007 at 2:16PM

The notes on Form 17 would be worth a read in such a case.

neetugopal · 17 February 2007 at 6:57PM

Thanks everyone for replying. There were some really useful information form me as I am first time LL. I have one doubt in my mind if I go for interest offset on my new home against rental income on BTL. Whether I will be liable for CGT if we were to sell our new home in the future?

How to reduce tax on rental income

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