Tax on Property Income - making the best of

sorton4

I have a property I let out and pay tax on every year. I am higher rate payer

My husband is a basic rate payer and we have a joint account from which the mortgage and rental income is paid from/into.

I have recently had a child and I believe he has a personal allowance of his own.

Am I making the most of the available options to me with regards to paying tax on my property income??

ceeforcat

I presume the purpose is to explore the options of transferring half or all of the property to you husband. There is no problem with that as long as you realise that he will legally own half of it if ever you choose to sell and will also be entitled to half of the income.

I am not sure of the revelance of your point regarding your new child - as far as I know children cannot legally own property.

John_Pierpoint

It could be put in trust for the kid BUT that transfer might well create a capital gains tax liability.
At the age of 18 the new adult would most probably change the nature of the trust and the trust would be possibly then be liable to highest rates of tax and possibly regular levies of Inheritance Tax.
Alternatively the property could become an asset of the 18 year old and give him a debilitation false sense of wealth.

xylophone

It could be put in trust for the kid

Wouldn't help (I'm assuming the income is more than £100 a year).
http://www.hmrc.gov.uk/trusts/types/minors.htm
"Some trusts are set up to give benefits to the minor unmarried child of the person who put the assets into the trust - the 'settlor'. These types of trusts are known as 'parental trusts for minors'. The income from the trust is taxed as the income of the settlor."

"Income payments below £100
If the income arising from all parental gifts made by a parent to a child is less than £100, the child's trust income is not counted as the settlor's for Income Tax purposes.
Reporting the tax paid on the settlor's return
Where the rules apply so that the income of the child is treated as the income of the settlor, the settlor is responsible for all Income Tax due. Because the trustees are required to pay tax on the income, the settlor can offset Income Tax paid by the trustee against the amount of tax they are due to pay. In some cases there may be more tax to pay and in others a refund may be due. The tax paid by trustees is only available to the settlor and not the child.
Details of the Income Tax paid by the trustees must be included on the personal tax return of the settlor. Each year, the settlor may need to complete form SA107 Trusts etc. - the trusts supplementary pages of the main SA100 Tax Return. This form tells HM Revenue & Customs about the Income Tax the trustees have paid on the settlor’s behalf."
http://www.propertytaxation.co.uk/info/a-tax-traps-gifting-property.html might be of interest.

John_Pierpoint

Yes it is a grand parent thing and unravelling the complexities would get very expensive if the family relationships were to fall apart.

jimmo

ceeforcat wrote: »

I presume the purpose is to explore the options of transferring half or all of the property to you husband. There is no problem with that as long as you realise that he will legally own half of it if ever you choose to sell and will also be entitled to half of the income.

Transferring half or all of the property to your husband would be effective for Income Tax purposes but watch out for Capital Gains Tax.

For example, if the property was your home before you married you have almost certainly built up some pretty substantial relief from Capital Gains Tax when the property is sold. Transferring all of the property to your husband now would eradicate that relief and your husband will have a Capital Gain of the sale price over your original purchase price and that could be very costly.

chrismac1

Does your husband have any involvement in the running of the property? If so, he could charge a management fee for his services which would count as his income but as en expense against your rental income.

I will now run away fast whilst the HMRC guys on this forum come down on me like a ton of the proverbial.

kidmugsy

Why not sell the property and pay down the mortgage on the house you live in? You pay no tax on reductions in your outgoings.

sorton4

kidmugsy wrote: »

Why not sell the property and pay down the mortgage on the house you live in? You pay no tax on reductions in your outgoings.

Wouldn't I be stung with Capital Gains tax. I have a very small mortgage on the second property, about 12% LTV.

jamesd

Do you have the largest permitted mortgage on the let property? Perhaps it would be to your benefit to withdraw more money from the lettings business to clear your personal mortgage. Presumably via a BTL mortgage. Mortgage interest deduction from rental income allowed only up to 100% of the value of the letting property at the time it was transferred to the letting business. This could then eliminate the mortgage interest on your residential property while increasing the mortgage interest deduction from rental income.

An opposite approach that increases tax but may increase profit is to increase the mortgage on the residential property and advance to the business money from that increased loan to clear any BTL mortgage on the let property. The residential interest rate is likely to be lower than the BTL rate so the lower interest rate would save money for the business, increasing the income before and after tax.

John_Pierpoint

I have a funny feeling that extracting "equity" capital from the business and then trying to claim the extra borrowing interest as expenses is something to have to think about before purchasing the business asset?
I expect someone qualified will be along to explain all the avoidance and evasion techniques.