btl mortgage and tax advice

alanhunt1

me and my wife have a small 10k mortgage in her name plus 100k savings which with a furthur 100k mortgage we will be looking to fund a btl property. now i am a non tax payer so i'd imagine the wife (who is a tax payer) will need to get the btl mortgage with me as joint owner. can the rent (after maybe setting it against the mortgage as an allowable expense?) be paid solely to me to avoid tax? or would it be seen as 50/50 between us?
im just actually not sure if i would be able to get the mortgage in my name only.
we were looking at just a 10 yr mortgage as the wife is 55- or is it likly we couldd get a longer term?

holly_hobby

Yes this is possible, the property should be held as tenants in common in unequal shares - which will correspond to the equivilent split in rental income under your beneficial interest in the property. (and also for CGT calc purposes when/if the property is disposed with a gain)

Once the election is made, it is permanent, and may only be changed if the actual % of ownership changes.

If you don't do this as a married couple, and hold it as joint tenants, HMRC will assume a 50% split each on rental income for income tax purposes.

HMRC Form 17 is reqd for completion, here is a direct link for you - http://www.hmrc.gov.uk/forms/form17.pdf

Hope this helps

Holly

somethingcorporate

If your wife is a lower rate tax payer then the blended rate would only be 10% (assuming it does not surpass your tax allowance) and obviously you can offset costs to bring this down (interest on mortgage, management fees, W&T allowance etc). Unless you have a very high yield you may just want to keep it 50/50 for the simplicity and point your effort in how you can bring the taxable income down.

holly_hobby

10% tax band only relates to savings income up to permitted allowances (£0 - £2560 for tax yr 2011/12) .

Earned income is taxed at min of 20% which is basic rate tax band (40/50 higher rate bands), as is savings income in excess of annual allowance.

If you are currently not liable for tax, have you considered holding some of the noted 100k savings, in your own name up to personal allowance limit, submitting a R85 request to the provider (to have interest paid gross) ?

Of course you will want to manage the shareholding and division of net taxable rental (or indeed savings/investment) income, to ensure that it doesn't tip your wife into 40% band (assuming she is currently a BRT).


Hope this helps

Holly

Wh05apk

holly_hobby wrote: »

10% tax band only relates to savings income up to permitted allowances (£0 - £2560 for tax yr 2011/12) .

I think he meant averaged across the two of them?

alanhunt1

thanks ,
my wife is already in higher band (50k)
think i understand, so if i transfered all 100k in my name and wife got a mort of say 90k (ie 190k property) then we could caim unequal shares the tax man would see us as equal shares (form 17) or would they look at the transfer of money from wifes portion of savings (isa) as a means of lessining her tax exposure?

out of interest how likely would i be able to get a 50% mortgage in my sole name on a property, being unemployed and just using the rent as income?

alternatively if we released equity in our property (valued 450k with 10k mort in wifes sole name) and used this to buy in my sole name? but then i suppose i could not claim mortgage interest as an allowable expense!?

holly_hobby

alanhunt1 wrote: »

thanks ,
my wife is already in higher band (50k)

Then any tax bearing investments need to be held in your name, to exploit firstly your personal & savings allowance, then each yr you both exploit the max allowances on any tax free vehicles (i.e ISAs). Any residual income to be in your name to incur only BRT on further liability.

Does your wife have an accountant ? If so, they should also be giving her this type of taxation advice as part of their remit.

alanhunt1 wrote: »

think i understand, so if i transfered all 100k in my name and wife got a mort of say 90k (ie 190k property) then we could caim unequal shares the tax man would see us as
equal shares (form 17)

You don't need to do this, a simple purchase as tenants in common, with a 99% to 1 % split and Form 17 nomination of benficial interest, would be satisfactory to achieve your objective.

NB - as stated earlier, any tenants in common and Form 17 election is permanent, UNLESS there is an amendment to the % held by either party (which may have CGT tax implications).

alanhunt1 wrote: »

out of interest how likely would i be able to get a 50% mortgage in my sole name on a property, being unemployed and just using the rent as income?

Most lenders have a min earned income of circa 25k. There are 2 lenders whom dont verify income, but you are unemployed so are not actually in reciept of any income (future rental income is not considered).

So your wife would need to be a joint mortgagor (borrower) with you - which is seperate to the beneficial ownership of the property i.e if the property is to be held in unequal shares as tenants in common for tax mitigation purposes.

To secure a mge the rental income needs to be circa 125% of the mortgage payment - in essence to demonstrate that it will be self sustaining. This is verified as part of the property survey process.

alanhunt1 wrote: »

alternatively if we released equity in our property (valued 450k with 10k mort in wifes sole name) and used this to buy in my sole name? but then i suppose i could not claim mortgage interest as an allowable expense!?

Yes, you may release equity from your private residence to fund a BTL purchase, and offset the resulting mge interest against rental income for inc tax purposes - BUT - there must be a clear audit trail between the 2 for HMRC purposes and inspection. Which obviously won't be difficult to demonstrate if aware of the requirements before hand.

Hope this helps

Holly

alex_p

Does anyone know if the shared ownership split needs to be the same as the rental income split for tax purposes?

So in the example above, the shared ownership is split 50/50 and rental 50/50.

However can it be the case that the rental is split 99/1 and then rental opposite 1/99? Or that is not allowed?

holly_hobby

alex_p wrote: »

Does anyone know if the shared ownership split needs to be the same as the rental income split for tax purposes?

So in the example above, the shared ownership is split 50/50 and rental 50/50.

However can it be the case that the rental is split 99/1 and then rental opposite 1/99? Or that is not allowed?

As already explained, in the case of married couples or those in a civil partnership, if a property is held as joint tenants, HMRC will also make an assumption that rental income is equally split. However, if the property is held as tenants in common, which is the only way to hold a property in unequal shares - the rental income may be apportioned according to the beneficial interest, via notification to HMRC under submission of Form 17 (and supporting evidence).

The rental income may only be apportioned, as a direct reflection of the beneficial ownership under which the property is held by the couple, i.e Mr & Mrs Bloggs own a property as tenants in common (99/1 ratio split), and receive a monthly net rental income of £100 for disclosure to HMRC via annual self assessment for inc tax purposes.

We know that Mr B. has 99% beneficial ownership, whilst Mrs B has 1% beneficial ownership (as per tenants in common deed & prev notified to HMRC via Form 17). (which as prev advised this may be later amended but it does involve a transfer of equity exercise & poss cgt liability)

Mr B's tax return will reflect net monthly rent of £99 (i.e equiv to his 99% beneficial share of the £100 recd), whilst Mrs B's return will reflect net monthly rent of £1 (i.e equiv to her 1% beneficial share of £100) .

Hope that explains the process and benefits.

If you do take 5 mins to read the link already provided earliler re HMRC Form 17 - it will give you further guidance.

As with many decisions, and especially involving tax and financial issues, it is always wise to obtain independant confirmation of any guidance given freely on a forum.

Hope this helps

Holly

alanhunt1

holly_hobby wrote: »

As already explained, in the case of married couples or those in a civil partnership, if a property is held as joint tenants, HMRC will also make an assumption that rental income is equally split. However, if the property is held as tenants in common, which is the only way to hold a property in unequal shares - the rental income may be apportioned according to the beneficial interest, via notification to HMRC under submission of Form 17 (and supporting evidence).

by supporting evidence i take it you mean a declaration or deed mentioned on form17? so no proof of the actual financial contribution towards the purchase of the property is required?
I think we will end up taking tax advice (we currently do not have an accountant) as you suggest.
thanks again thou for all the help!
Alan