Tax on rental income - different rate tax payers

jimmo

If you put the house into joint names now you will be regarded as having sold a half share to your partner at open market value.

You will therefore realise a Capital Gain but that be covered Private Residence Relief, so there will be no Capital Gains Tax to pay.

When you eventually come to sell the house you will realise a gain on your remaining half share but again, you will be entitled to Private Residence Relief, including the final 3 years of ownership and letting relief.

Your partner however will have to calculate her Capital Gain by reference to her acquisition value and, because she has never lived there during her period of ownership, she will not be entitled to any private Residence Relief.

One more thing, it appears that you will be gifting to her a half share interest of a property with a sitting tenant. That is probably not worth as much as a house with vacant possession and you will probably eventually sell it with vacant possession.

So, you probably need to pay a solicitor to transfer the property into joint names.

If the house increases in value from now on, you may well need to pay an accountant to make the computations and you will almost certainly need a professional valuer for the valuation issues.

.

CLAPTON

do the arthimetic

what do you expect the profits to be when you take your allowed expenses into account?

is £6,900 the actual gross rent or is that the profit after you have deducted allowable expenses (mortgage interest, agent fees, wear & tear (if furnished let), maintence etc etc)?

you will (only) be saving a max of 20% of that figure or 10% if you divide the property 50-50

given you have to gain your mortgage providers permission (doubtless at a cost) plus solitors fees etc...
is it all worth it given as Jimmo has explained, you may well be a major loser for cgt when you come to sell

robbie1980

Very interesting.....

So we are not classed as partnered in anyway (not spouse or civil partnered). But to set up an agree on how the profit and losses are shared, which can be different to how the property is owned, we need to be joint owners.

I will look into the capital gains effect for my partner as the point you make is a good one. Would her half be subject to the 3 year rule, as we may only let it for 3-5 years?

I think i'm right in saying if we sold it 3 years after the first letting date, she and I would have no CGT to pay irrespective of how much the property might go up (or not as the case may be!).

I should have said that it is most likely after 5 years from now we will sell, which will limit the CGT payable from us both.

It sounds like it would be wise to have an independant valuation done now for the record? If so, could this be classes as an expenditure against rental income?
Thanks
Rob

robbie1980

Hi Clapton.

Good point. 6900 gross. Based on costs incurred and offsetting finders fee, mortgage interest etc i predict just under 5500 net

Interest is BR+.17 on so interest <500 per year currently (this could rise in 2 years if permission not granted and need to swap). Cost was only £25 to get permission.

Net at 40% ~ 2.2K tax and at 20% ~ 1.1k tax so arrangement would save ~ 1.1k per year on current arrangment.

Over 3 years with no potential for CGT, 3.3k less solicitors fees (estimated £500) is a good saving.

CLAPTON

1. there have no legally recognised relationship relevent to tax.

2. you need to be joint owners to progress but remember your mortgage provider has to agree and there will be costs .. I've no real idea but they they no longer be willing to agree a permission to let but insist on a BTL

3. she has no 3 year rule, no letting relief (worth up to £40K);
your half will still benefit from PPR and the 3 year rule and letting relief (up to 40K)

4. what profit do your expect from the rental?

robbie1980

1. Do you mean mine and my partners relation is not recognised from a tax perspective?

2. Ah you mean informing the lenders that we are now joint owners. Yes, agreed, this might void the Permission To Let defeating the purpose of saving when interest will be much higher

3. Ah again! Not sure what CGT she would pay - i know depends on value once sold etc

4. profit expected ~ 5500 net less 4200 total payments = 1300/yr. So actually the profit is 5500

CLAPTON

2. no, you don't 'inform ' the lenders you are joint owners;
you ask their permission and agree a new mortgage (they have a charge on the property registered at the land registry so you can't change the deeds without their permission).
They may or may not insist on a new mortgage ; you can only ask them.

3. assuming she owns half the property
she will pay cgt based on the capital gain
i.e. half of (price on sale - acquisition price (i.e. 2012 price)-expenses)

she has a cgt allowance of 10,600 and then pays cgt at 18 or 28%

4. I don't understand that

robbie1980

Thanks for your patience

2) Understood

3) Property likely worth 115k now. Lets say it rises 5k per year for 5 years = 140k. She pays CGT on 50% of 12.5k at which ever rate, but is the 10,600 per year in which case there is none to pay?

4) Rental income = 12x575 = 6900
Expenses offset ~ 1400
Min mortgage payment = 300 but paying 350 per month
Is the profit from renting not 6900-1400 = 5500
After paying the mortage profit is 5500-(12x350) = 1300

robbie1980

I think my mind is made up

Spending a lot of time, effort and some money in order to pay tax at a lower rate. Or.......

In doing this risk a higher mortgage rate and pay for it in compound interest.

I think it's better to keep it simple and pay 40% on the net figure and smile at the low mortgage rate.

Efficienct though to do any maintenance on the property which can be offset against income and keep the property in the same condition when it comes to sale and incure no CGT due to residence etc.

Thanks for all your comments and help - have learnt a bit!

CLAPTON

robbie1980 wrote: »

Thanks for your patience

2) Understood

3) Property likely worth 115k now. Lets say it rises 5k per year for 5 years = 140k. She pays CGT on 50% of 12.5k at which ever rate, but is the 10,600 per year in which case there is none to pay?

4) Rental income = 12x575 = 6900
Expenses offset ~ 1400
Min mortgage payment = 300 but paying 350 per month
Is the profit from renting not 6900-1400 = 5500
After paying the mortage profit is 5500-(12x350) = 1300

basically NO

3) if the price rises by 25k
then her share is 12.5k
less 10.6k cgt allowance
so her profit is 1.9K at 18% = £224 although you will probably have some costs of buying/selling to offset


4. rental income
you can only offset the mortgage INTEREST against the rental income and not the actual monthly payment; but you can offset other costs, 10% if furnished... you really need to look at a landlord site to understand both the tax and your legal obligations (especially about gas safety, deposit protection etc.)