Avoiding 40% tax

geordieabroad

Reducing 40% earnings back to 20%


Firstly I am completely clueless about taxation, so please be gentle. I would appreciate a bit of assistance. My hubby's salary is likely to bring him into the 40% bracket for the first time, looks like he'll be roughly £5000 into the 40% tax bracket. He is a civil servant. I have read somewhere that contributing to a private pension (let's say £5000 per year) would mean he would be taxed less and could potentially bring him back into the 20% bracket. Is it true and is it that easy? Would he contribute to a private pension via his work, showing on his monthly payslip, or would he do this entirely privately and get any 40% tax paid on his salary back through self assessment? Hubby is already paying added years to his civil service pension to give him a full 40/80th of his current civil service pension, but he is uncertain about being able to to contribute AVCs to this pension, which is why I am asking about a private pension.


Secondly, with the rise in hubby's salary this year, comes the consequences of what we do with income from a house we rent. Hubby had previously stayed under the 40% tax limit, even with this income added onto his salary and he has simply paid 20% of his profit on the house in tax every year. This year I am not working (in the UK) and pay my taxes in another country and my only UK income is from our rented house. Our income this year should be roughly £2500 (hubby) and £2500 (me). The obvious way of avoiding hubby paying tax on his income is to transfer ownership of the house into my name, making me the sole owner and giving me an income of roughly £5000, keeping me under the personal limit for paying any tax. If hubby keeps his 50% ownership of the house, he is looking at 40% of £2500 going to HM Revenue, ie £1000 for tax year 2011-12, if he transfers ownership of the house to me, the £5000 rental profit goes all to me and I will pay no tax on that amount? The house is worth roughly £220,000 if it makes a difference.

We have a mortgage on this house, but in fact we also have an offsetting account we keep having to empty, the offsetting could pay off this mortgage immediately, but we are keeping this mortgage simply because it gives us quick access to 40k cash if we needed it and we also previously got a very good rate on our ISAs with the same mortgage lender. I am not sure who wise this is to do, but that's how we have it at the moment.

So finally the question, how much roughly would we be looking at to transfer ownership of our house into my name only? I can guess Land Registry Costs, legal costs, mortgage costs..... am I right? How much do you think it would be?

Thanks in advance for any advice

jem16

geordieabroad wrote: »

Reducing 40% earnings back to 20%


Firstly I am completely clueless about taxation, so please be gentle. I would appreciate a bit of assistance. My hubby's salary is likely to bring him into the 40% bracket for the first time, looks like he'll be roughly £5000 into the 40% tax bracket.

Remember to include the perosnal allowance in your calculations. 40% tax starts at £7475 + £35,000 = £42,475.

He is a civil servant. I have read somewhere that contributing to a private pension (let's say £5000 per year) would mean he would be taxed less and could potentially bring him back into the 20% bracket. Is it true and is it that easy? Would he contribute to a private pension via his work, showing on his monthly payslip, or would he do this entirely privately and get any 40% tax paid on his salary back through self assessment?

Yes it's true.

If he contributes more to his civil service pension, either as added years or AVCs, the tax relief is instant as the contributions are taken off his gross salary before tax.

If he takes out a private pension it would be paid to the provider by direct debit or cheque and he would pay the gross amount minus 20% basic rate tax. The other 20% tax relief would be claimed through his tax return or by asking HMRC to adjust the tax code.

As to the house, changing over the ownership would avoid the tax for him but I don't know how this works out costwise.

AirlieBird

geordieabroad wrote: »

My hubby's salary is likely to bring him into the 40% bracket for the first time, looks like he'll be roughly £5000 into the 40% tax bracket. He is a civil servant. I have read somewhere that contributing to a private pension (let's say £5000 per year) would mean he would be taxed less and could potentially bring him back into the 20% bracket.

Why? You do know he will only pay 40% on the bit that is above the higher rate threshold? He still pays 20% on the bit that falls into the basic rate band.

geordieabroad wrote: »

Hubby is already paying added years to his civil service pension to give him a full 40/80th of his current civil service pension, but he is uncertain about being able to to contribute AVCs to this pension, which is why I am asking about a private pension.

You can no longer elect to buy added years in the Civil Service Scheme. Your options are to buy "Added Pension" or, as you enquire, AVC. The Civil Service AVC schemes are run by Standard Life and Scottish Widows. Alternatively, of course, you are entirely free to arrange your own private pension.

If you select your hubbys pension scheme here and go the section on Boosting your Pension it will give you your options. Whether buying added pension or going the AVC route the contributions are taken after tax has been deducted (unlike the main scheme where contributions are taken before tax has been deducted). The pension scheme will claim back basic rate tax from HMRC and add it to the pension, but your hubby will need to claim back the higher rate tax himself.

taxsaver

The situation might be further complicated if you are 'non-resident' for tax purposes, in which case (I believe) you will not have a UK personal allowance so would not be 'tax free' on rental income. Furthermore, the non-resident landlord scheme rules would apply, meaning the rent would have to be paid by your tenant (or agent if you are using one) to you net of 20% tax unless and until you apply for and gain an exemption from HMRC.

geordieabroad

Well at the moment, HM Revenue class me as a resident, like my husband, even though we have not worked regularly in the UK for 7 years, civil servants serving abroad, I have in the past had an income paid from the UK + an income from a local job, 2 countries both claiming taxes as a resident of both countries, yes rather unusual, both incomes declared to both tax systems. This is the first year I will have only income from the house as UK income, need to ask HM Revenue how I am regarded, I have been classed every year as a UK resident tax payer, so has husband, as civil servants working abroad. Time for another phone call.....

thanks for the advice.

Does anyone out there have any idea of costs to transfer ownership of house into my name, if it turns out this is going to be of financial benefit to us as a family?

le_loup

geordieabroad wrote: »

Does anyone out there have any idea of costs to transfer ownership of house into my name, if it turns out this is going to be of financial benefit to us as a family?

Whatever the stamp duty and legal and land registry costs; capital gains tax may well be payable if the value has increased.

geordieabroad

le_loup wrote: »

Whatever the stamp duty and legal and land registry costs; capital gains tax may well be payable if the value has increased.

do you seriously pay stamp duty when transferring ownership from joint tenancy husband and wife to just the wife?

No CGT payable as civil servants posted abroad are exempt (according to HM Revenue)

I am expecting land registry fees, but solicitors' fees too? I am out of touch with UK legal fees. It would mean a transfer of mortgage to sole name too, but we could in fact consider paying off the mortgage. If that were the case, would it just be land registry fees?

I am beginning to think this is not such a good idea.

somethingcorporate

If your profit is £5k pa for arguments sake, the income tax you will pay on it at present is 30% (blended 20% for you and 40% for your husband). You would save an additional 10% (£500 pa) by transferring the house into your name. For all the hassle of doing it and the associated risks do you think it would be worth it for such a small amount? There are lots of other ways to reduce your taxable income on a B2L property, are you sure you are fully exploiting these? (e.g. 10% W&T allowance on a furnished property, management fees etc).

It would be less costly and likely more beneficial in looking into legitimate but cost effective ways of brining your taxable profit down rather than the hassle of transferring it out of one name and into another. Alternatively, if you do not need the money you could transfer it into your husbands (private) pension and claim tax relief on the lot.

Good luck!

Any

No CGT anyway, as transfers between wife&husband occure under no gain/no loss basis..(or so I believe).
Not sure about the stamp duty though..

Phil_rich

Can you re-mortgage the BTL to a level where the income is equivilant to the interest payments, therfore you would not be making a profit and not paying tax. Then put the cash in a savings account?

I may be talking b8l8cks?

Phil

hcb42

isn't getting into the 40% bracket a good thing.....it means he is earning more..never heard of anyone wanting to earn less to avoid the tax band.