Transfer property to wife...yes or no?

simonfitba

Hello, folks, here's the situation. I'll try to be brief.

At the moment my wife (of 18 months) and I live in a flat in Scotland that I am the sole owner of.

I have lived there since purchase (£52k) in 1999. It is now worth about £125k.

We are moving to a new house and will be renting the flat for a minimum of three years, maximum of five, at which point we will sell the flat.

I am a 40 per cent tax payer. She pays no tax.

Question 1.... I was wondering whether it was wise from a tax point of view (both income tax and CGT) to transfer the flat into my wife's name.

Question 2.... Would it be worth it to transfer the property back into my name before selling?

I realise I would have to trust my wife not to run off with the milkman!

Thanks for any help,

Simon.

CLAPTON

for tax on rental income it would be better to be in your wife's name


for cgt purposes it is better to be in your name as you qualify for principal private residency (PPR) relief as you lived there as the owner (probabaly no cgt for many years of letting), whilst your wife will not qualify as she didn't live there during her ownership


so it's all in the details.

jimmo

As you and your wife are currently living in the flat you may have the opportunity to achieve your aim.

The normal rule is that transfers between husband and wife take place at “No Gain No Loss”. In other words if you bought the flat for £52k you will be deemed to have sold it to your wife for £52k.

If the transfer takes place after you have moved out she will not have lived in the flat during the course of her ownership and so will not qualify for Private Residence Relief and her full gain (proceeds over £52k) will be chargeable.

http://www.hmrc.gov.uk/manuals/cgmanual/CG22200.htm


However if the transfer takes place whilst you are still living there, there is a special provision extending her period of ownership and period of residence to match your own.

http://www.hmrc.gov.uk/manuals/cgmanual/cg64950.htm

http://www.hmrc.gov.uk/manuals/cgmanual/cg64953.htm


In that case, and assuming she owned no other home between 1999 and the date she moved in with you, she will qualify for PRR in exactly the same way as you would.

Then you would achieve your aim of getting the letting income into her name and, in the unlikely event that CGT is chargeable, her liability would be less than yours.

However, as Clapton said, its all in the details, yours and your wife‘s.

Manzila

Using your wife's name will be best.

simonfitba

Thanks for all the responses for far.

Unfortunately my wife does own another property, but has been living with me for three years.

I'm guessing I should just keep the flat in my name otherwise we'll take a bigger CGT hit.

jimmo

simonfitba wrote: »

I'm guessing I should just keep the flat in my name otherwise we'll take a bigger CGT hit.

That is probably the simplest solution but if you have the time there are still things to look at.
Use this for reference.

http://www.hmrc.gov.uk/helpsheets/hs283.pdf

As things stand on this forum your wife owns another property that was her main residence up until 3 years ago when your flat became her main residence.
If she has been, and still is, letting that property her capital gains situation is very similar to your own and the combination of actual residence, lettings relief and the final 3 years of ownership probably means that she would face no Capital Gains Tax if she sold her property some time in the not too distant future but the clock is ticking and it is worth keeping an eye on things.
Capital gains are calculated on a straight line basis so in very rough and ready terms the gain on your flat, if you sold now would be £73k and, as you have owned the flat for 14 years that is £5,200 per year.
If you were to transfer your flat to your wife whilst you still both live there the “simple” way to look at this is that for each year your wife lived in her own property she will generate a capital gain of £5,200 on your flat.
A more complicated way to look at it would be to look at the annual rate of gain on her property to see whether her taking a CG hit on her property may be cheaper by nominating your flat as her main residence.
How does that compare with you taking the Income Tax hit on the letting profits?
On that point have you fully considered how any mortgage interest you have to pay will effect things?
If the flat is worth £125k when you start letting it you can claim a deduction for interest on up to £125k‘s worth of borrowings.
See example 2 here.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

simonfitba

Thanks Jimmo for all the advice.

I'm thinking of keeping the status quo, seems the simplest way.

Let's say for arguments sake I keep my flat in my name. Say in five years we split up and I move back to the flat as my main residence.

Does my CGT relief reset?

PS. The last point on deduction of interest on the mortgage is very interesting. But I have no mortgage on the property.

kidmugsy

simonfitba wrote: »

PS. The last point on deduction of interest on the mortgage is very interesting. But I have no mortgage on the property.

Would mortgaging the flat on a BTL-type mortgage make the purchase of your new place easier? Or let you pay chunks off the mortgage early? Or let you use an offset mortgage?

SuperHan

simonfitba wrote: »

Let's say for arguments sake I keep my flat in my name. Say in five years we split up and I move back to the flat as my main residence.
.

You still get principal private residence relief for when you lived there, plus any you generate when you come back and three years of the time you were moved out (provided you do actually move back in). You also automatically get the last 3 years of ownership, so it would look like this:

14 (i forgot how long you lived there) years up until today: exempt
3 years of the 5 you were gone: exempt
2 years of the 5: chargeable
any time after while you live there: exempt.

If you sell within one year of moving pack, as the final 3 years are exempt, the whole 5 years you were gone would be exempt. Obviously if its longer than 5 years this is slightly different.

You also get a maximum 40k letting relief if you let the property too.

Have you considered transferring half of the property? If you do that, your wife can be assessed on half of the rental income.

I vaguely remember something about an election to transfer all the rental income on to a 50% owner, but it's vague and I could be wrong!!

I'm not entirely sure how 50% ownership would affect the PPR relief though.

simonfitba

Cheers SuperHan.

I don't think 100 per cent of rental income can go to 50 per cent owner.

But I'm pretty sure I can get double CGT relief by giving the wife 50 per cent of the flat.

Question is, do I have to give her half before we move out to another "main" property, or can it be done at any time in the future and still get the benefits?

More reading and digging needed methinks...

PS. It just occurred to me that I could give her 99 per cent of the flat. Would this still make us "joint owners" in the eyes of the tax man, and still give double CGT relief?

jimmo

simonfitba wrote: »

Question is, do I have to give her half before we move out to another "main" property, or can it be done at any time in the future and still get the benefits?

That, quite frankly, is the easy bit of this and regardless of whether you gift the entire flat, 99% of it or 50% of it the principle will remain the same.

Regardless of when you make the gift you will be deemed to have sold whatever proportion of the flat you give to her for what it cost you and you will have no capital gain on that disposal.

If you make the gift whilst you are both still living there she will “inherit” your purchase price and your right to claim Private Residence Relief but that has to run alongside her right to claim PRR in respect of her own property and she can only claim for one property at any given time.

As if to throw another spanner in the works SuperHan is correct that, provided you retain an interest in the flat, if you eventually move back into it that will create a period of absence. You would then be able to claim relief for a period of absence of up to 3 years but if you do so there will be a knock-on effect to your new house.

That is because, apart from the final 3 years of ownership of any property you have occupied as your main residence, we can all only claim for one property at a time.

Take another look at Helpsheet 283. Link repeated here for convenience.

http://www.hmrc.gov.uk/helpsheets/hs283.pdf


Periods of absence starts on page 4 but the relevant bit is at the top of page 5.

Just to add to that a married couple can only have one main residence between them at any one time and any election must be made jointly and, if you are going to ask your wife to sign an election “just in case we split up“ you‘re a braver man than me.

Coming back to the house you are about to buy, if you make the election for the flat, you will effectively be creating a chargeable period for the new house but that will only become relevant when you sell it.

Turning now to letting aspect the point on mortgage interest that I was trying to make was that if you need to take out a mortgage to buy the new house you have the opportunity to set some or all of the mortgage interest (up to the current value of the flat when you first let it) against the letting income from the flat. For lots of people that would reduce the lettings profits right down and make transfers of ownership pretty futile.

More info if you need it .

To try to tie together the capital gains aspect and the lettings aspect together; in theory it would probably be wise to gift a 99% share in the flat to your wife for the duration of the letting period and then for her to gift a pretty substantial share back to you after the letting has ceased but before the flat is sold.

In practice that could be totally scuppered by what is known as “The Ramsay Principle”

Basically HMRC can ignore a series of transactions which have no commercial purpose and the only motive was to save tax.

http://en.wikipedia.org/wiki/The_Ramsay_Principle


Following the Ramsay Principle the entire letting profits and the entire capital gain would be yours.

Then it comes down to the nitty-gritty. Is the tax at stake worth the effort involved?