BTL - want to avoid higher rate tax

Good plan.




** Tenancies in Eng/Wales: Guides for landlords and tenants This thread is intended to provide information to both landlords and tenants relating to Assured Shorthold Tenancies (ASTs) in England and Wales.

Topics covered:

* Repairing Obligations: the law, common misconceptions, reporting/enforcing, retaliatory eviction & the new tenant protection (2015)

* Deposits: payment, protection and return

* Ending/renewing an AST: what happens when a fixed term ends? How can a LL or tenant end a tenancy? What is a periodic tenancy?

* Rent increases: when & how can rent be increased?

* Repossession: what if a LL's mortgage lender repossesses the property?

* New landlords: advice, information & links

* Letting agents: how should a landlord select or sack?

As spouses, by default, HMRC will consider that you own the property income 50:50 for tax purposes, whether you actually jointly own it as joint tenants, or beneficially own it 50:50 as tenants in common, or even if you legally/beneficially own it in some other proportion such as 75:25 or 99:1.

However if you own as tenants in common in unequal shares (eg beneficial ownership split 99:1) you can fill out Form 17 to tell HMRC that you want the income to be split in line with that beneficial ownership (99:1) and save yourselves some income tax. When filling out the form and sending it off you also have to provide evidence of the differing beneficial ownership.

However if you do go that route of keeping it in two names and doing a Form 17 to break HMRC's 50:50 assumption, the only option you have is for the income to be split in line with beneficial ownership and that will also be how any capital gains are deemed to be allocated.

Say for example you sell the house after a decade and after deducting reliefs for the time it was your principal private residence, there is a £50k capital gain. Maybe your husband has lots of investments and as the luck of timing would have it, he has made some capital gains and already used about £7k of his CGT annual exemption for that year so only has a little under £5k of gains exemption left over. When you carve up the gains he has to take 99% of them, i.e. almost the whole £50k, and then after only taking off a little under £5k exemption he has to pay high rate CGT at 28% so winds up with a tax bill over £12.5k. Whereas meanwhile you only have £500 gains which don't get taxed as they're within your exemption.

If instead you'd owned half the property, he'd avoid tax on about £25k of gains at 28% while you only pay tax on a little over half your share of the gains (due to annual exemption) and the tax you do pay as lower rate taxpayer is at a nice low rate of 18% not 28%. Between the two of you would have a CGT tax bill that's about a third lower than it would have been if you were declaring a 99:1 split.

So you have to think through the consequences and different scenarios, as well as updating wills etc.

One option would be to put the entire house in your name. Then HMRC do not do the 50:50 presumption (as you're not joint legal owners) so you don't have to file a Form 17 to avoid it, so you don't have to set the income split as the same as the beneficial ownership split via that form, so you have potentially greater flexibility, perhaps.