Tax avoidance, is this it?

74jax

I own a house, OH owns an appartment.

OH moved in with me and rents out his appartment paying 40% tax on income.

We are getting married in June so effectively then own half of everything each.

If the rent is then paid to me, instead of him, is this classed as tax avoidance (I am not a higher tax rate payer).

Murdina

I think you need to do rather more than get married! The flat is still his in his name only. You could transfer half (after marriage CGT free) either by adding your name or doing a deed of trust.

Then you can be taxed on it in equal shares:

http://www.hmrc.gov.uk/manuals/pimmanual/pim1030.htm

Alternatively you could declare your ownership in different proportions in the deed of trust and follow that.

Be aware that the same proportions will follow for CGT. If the property was at some time his only or main residence you may potentially be making the CGT position worse by transferring part to you.

I would recommend you speak to an accountant or tax adviser and get them to run through some figures.

If you do acquire a share remember to register for self-assessment.

74jax

Murdina wrote: »

I think you need to do rather more than get married! The flat is still his in his name only. You could transfer half (after marriage CGT free) either by adding your name or doing a deed of trust.

Then you can be taxed on it in equal shares:

http://www.hmrc.gov.uk/manuals/pimmanual/pim1030.htm

.

Thanks for that, will go and read it now.

jamesd

It's definitely tax avoidance and that is a good thing and completely legal. It is not tax evasion, which is against the law.

He should get valuations for the property at the time it entered his property rental business. That will be needed for later use. It's needed to establish how much can be borrowed with full tax relief on the mortgage interest - that amount is all interest on a loan up to the value of the property at the time it entered the letting business.

You and he should learn about the principal private residence relief and letting relief. Letting relief is only available for a place that's been a PPR - so only for him, not for you for this apartment - and is available on up to £40,000 of capital gain.

Because of the reliefs available it might be best to have a big mortgage interest deduction for the income combined with the CGT benefits. If there happens not to be a mortgage already he can withdraw capital from the lettings business by taking out a mortgage. That mortgage doesn't have to be secured on the BTL property, it can be on the one you two both live in. The advantage of the one you live in is that the fees and interest rates on residential home mortgages are lower than for let homes. When he transferred the property to the lettings business he injected into the business an amount of capital equal to his equity at the time. That's the capital he can take out if he wants to.

Note that it's only the interest that can be deducted from income, not any capital payments. This is part of why interest only mortgages are very popular for BTL.

I call this a lettings business because that's what it is. An accountant familiar with BTL can advise you on the issues.

antrobus

jamesd wrote: »

He should get valuations for the property at the time it entered his property rental business. That will be needed for later CGT use.

On a point of order, no it won't. It might be needed later for IT use, but it has no relevance to CGT.

thenudeone

Here's my tuppence worth:

Since your OH owns the apartment, only he can rent it out.
Any rental income will be his (and on his tax return), even if he asks the tenant to pay it into your bank account. Just because it arrives in your account doesn't mean it's your income for tax purposes.

He'd need to do something else in order to get some of the income to be yours for tax purposes.

BTW once you're married it's perfectly legitimate to shuffle assets between you to minimise your tax bill - it's one of the benefits of marriage.

Kynthia

As has been stated above, the property is not in your name so it's not your income to declare. However you could talk to a solicitor about a trust deed or getting your name added to the deeds to make yourself either an owner 50:50 or use a declaration form 17 to have a different share of the income.

However as you have never lived in the property, when it comes to selling it you will not be able to claim PPR and letting relief on your share of the capital gains tax whereas your husband would be able to. Therefore by saving on property tax you could be increasing your liability for CGT. It might be worth getting professional advice.

74jax

jamesd wrote: »

It's definitely tax avoidance and that is a good thing and completely legal. It is not tax evasion, which is against the law.

He should get valuations for the property at the time it entered his property rental business. That will be needed for later use. It's needed to establish how much can be borrowed with full tax relief on the mortgage interest - that amount is all interest on a loan up to the value of the property at the time it entered the letting business.

You and he should learn about the principal private residence relief and letting relief. Letting relief is only available for a place that's been a PPR - so only for him, not for you for this apartment - and is available on up to £40,000 of capital gain.

Because of the reliefs available it might be best to have a big mortgage interest deduction for the income combined with the CGT benefits. If there happens not to be a mortgage already he can withdraw capital from the lettings business by taking out a mortgage. That mortgage doesn't have to be secured on the BTL property, it can be on the one you two both live in. The advantage of the one you live in is that the fees and interest rates on residential home mortgages are lower than for let homes. When he transferred the property to the lettings business he injected into the business an amount of capital equal to his equity at the time. That's the capital he can take out if he wants to.

Note that it's only the interest that can be deducted from income, not any capital payments. This is part of why interest only mortgages are very popular for BTL.

I call this a lettings business because that's what it is. An accountant familiar with BTL can advise you on the issues.

ooo more reading up to do, this time on PPR.

Just as an added piece of info, his appartment approx 200k is not mortgaged, my house has around 35k mortgage on it which will be paid off when we marry.

nomunnofun

Unfortunately the mortgages are a total irrelevancy when coming to compute the Capital gains.

Cook_County

But the interest payable could be very useful as a rental deduction if you re-finance the rental property correctly.

jamesd

You two might consider this approach to improving your position:

1. Do any clearing of the mortgage on your house.
2. Take out a mortgage secured on your house to withdraw equity from his apartment. The interest on this mortgage is fully deductible from rental income from his apartment. You'll need a valuation to get the LTV. I think that both mortgage arrangement fee and valuation fee are counted against capital, not income, but do note any correction on this if someone makes one. He needs to be tracking capital work like property improvements vs maintainance costs that are deductible from annual income anyway.
3. Invest the money.

This delivers some useful benefits for you:

A. He retains 100% ownership of the apartment along with his PPR and lettings relief entitlement.
B. The money can be given to you and invested in your name, getting the better tax rate.
C. He gets that nice tax reduction from the interest deduction.

You could for example invest the money in a BTL property in your name.