First Buy-to-let

andyd55

Good evening,

Currently investigating the possibility of renting out our current property and buying a new home for ourselves. Question is reference tax on earnings from buy-to-let, I am within the 40% tax bracket but my wife is in the 20% so if we put buy-to-let in her name will we only pay 20% tax?

anselld

andyd55 wrote: »

Good evening,

Currently investigating the possibility of renting out our current property and buying a new home for ourselves. Question is reference tax on earnings from buy-to-let, I am within the 40% tax bracket but my wife is in the 20% so if we put buy-to-let in her name will we only pay 20% tax?

Yes, but you must transfer legal ownership as income can be taxed in the same proportions as ownership.

00ec25

No "we" will not!
if the property is entirely in her name then SHE will pay tax @20% if her total income is still within the 20% threshold, it will be entirely her income not "ours"

as you are (I assume) legally married then your alternatives are:

a) if you and her hold the BTL as joint tenants the income must be split 50/50 - there is no other legal option for a joint tenancy

b) on the other hand if you buy as tenants in common then the income must be split in accordance with your respective % holdings and you declare the split of income to HMRC using Form 17. the point of this is it allows you to bias the underlying actual ownership holdings in favour of the person with the lowest income tax liability whilst allowing both of you to remain legal owners and therefore both have CGT allowances when you sell

Note - Form 17 applies only if you are married, if not married the income can be split however you want if you are TIC

andyd55

00ec25 wrote: »

b) on the other hand if you buy as tenants in common then the income must be split in accordance with your respective % holdings and you declare the split of income to HMRC using Form 17. the point of this is it allows you to bias the underlying actual ownership holdings in favour of the person with the lowest income tax liability whilst allowing both of you to remain legal owners and therefore both have CGT allowances when you sell

Note - Form 17 applies only if you are married, if not married the income can be split however you want if you are TIC

What advantage is both of us remaining legal owners wrt CGT allowances?

Fire_Fox

http://www.hmrc.gov.uk/cgt/
http://www.hmrc.gov.uk/incometax/
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4017814

00ec25

you do realise that becuase it is a BTL when it is sold each owner is liable for CGT?
each liable person gets a personal allowance (10,600 at 12/13 tax year rate)
plus
if the BTL was previously your main (ie martial) home (which I think is the case for you) then each owner additionally gets up to a maximum of £40,000 lettings relief

therefore 2 owners have 101,200 of CGT exemptions. One owner only has 50,600 of exemtpion before CGT is payable

it is then a guessing game where the mathematical break even point will be. 2 owners will pay more in income tax than the basic rate one owner but 2 owners will pay less in CGT than one owner will

care to speculate on how long you are going to keep the hosue and how much its value will grow ... therefore should you pay more income tax overall as a couple and save on CGT or should you forget CGT and save on income tax?????????
as TIC it is perfectly legal for you to own 1% of it and thus pay 40% income tax on your 1% of the net profit from the rental whilst wife pays 20% on 99% of the profit, but you get the full 10,600 and 40,000 CGT allowance because you own 1%

deciding which is better for you is a guessing game, but do remember the old adage- NEVER let the tax tail wag the dog - ie dont do something purely because of tax

anselld

00ec25 wrote: »

you do realise that becuase it is a BTL when it is sold each owner is liable for CGT?
each liable person gets a personal allowance (10,600 at 12/13 tax year rate)
plus
if the BTL was previously your main (ie martial) home (which I think is the case for you) then each owner additionally gets up to a maximum of £40,000 lettings relief

therefore 2 owners have 101,200 of CGT exemptions. One owner only has 50,600 of exemtpion before CGT is payable

it is then a guessing game where the mathematical break even point will be. 2 owners will pay more in income tax than the basic rate one owner but 2 owners will pay less in CGT than one owner will

care to speculate on how long you are going to keep the hosue and how much its value will grow ... therefore should you pay more income tax overall as a couple and save on CGT or should you forget CGT and save on income tax?????????
as TIC it is perfectly legal for you to own 1% of it and thus pay 40% income tax on your 1% of the net profit from the rental whilst wife pays 20% on 99% of the profit, but you get the full 10,600 and 40,000 CGT allowance because you own 1%

deciding which is better for you is a guessing game, but do remember the old adage- NEVER let the tax tail wag the dog - ie dont do something purely because of tax

Agreed, but ownership between spouses can be optimised for income in the short/medium term and then transferred to optimise for CGT in a respectable time prior to disposal.

jimjames

With the current market and predictions for the future being able to pay tax on CGT from a current purchase would seem to be something that was worthwhile as it means you've made a profit!

If you buy as tenants in common you will need a trust deed drawn up, the cost is around £150 using a solicitor. We did this and so far it seems like a good option with an 85/15 split.

andyd55

many thanks for help guys & gurls!! will speak to our solicitor but think a tenants in common with a spilt seems best idea.