Avoiding Income Tax on rental property

cardiff_blue

I plan to rent out a property , making around £150 a month. this will be paid into a joint account of myself and my wife. I am very close to the £35000 tax threshold so is it possible to say this income is my wifes?

Does this come down to joint tenancy or tenancy in common? between me and my wife?

any advice greatly appreciated .


Also, as far as Capital Gains Tax goes, am i correct in thinking if the property makes a gain of £10,000 in year one, and £10,000 year two, then my Capital gains tax allowance of £10,000 a year means i wont pay any CGT if i were to sell ? ( I realise these figures are highly unrealistic, and are just as an example!)

00ec25

rather an emotive title - standby by an earful as this board does not like tax dodgers....


you are legally married thereforre as you have realised your tax affairs depend wholly on how you and your wife own the property

joint tenants (50/50) - there is no other option but to split all income and expenses 50/50 so as to calculate your respective net profit and pay tax individually

TIC - net profit is calculated in accordance with the TIC shares. Furthermore as a married couple you must complete Form 17 to notify HMRC of this fact.
http://search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?record=TS9D3da9t7I&formId=5159

http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM9850.htm

If you want to alter the portions you will have to also change the underlying ownership by altering the Land Registry records, you can either DIY that using the info provided by the Land Registry (there is a very helpful reps who comes on here to post the right links ) or use a solicitor


BTW - just in case you have made a common mistake seen on the boards you do realise that 40% tax starts at £41,450 not "35,000" ie personal allowance 9,440 + 20% band 32,010 = 41,450

Lovelyjoolz

The person who owns the property pays the income tax on the rental profit so yes, your wife can be the one to earn the profit and pay the tax, if you gift your wife the house.

Before you go ahead and start a rental business, it pays to ensure all your figures are correct so that no nasty surprises come and bite you on your bum later.

Are you sure that the £150 profit figure is correct? It seems very low - are you sure you are offsetting only the things you are allowed? Remember, you can only offset the interest portion of your mortgage, not the entire mortgage payment.

Talking of the mortgage - have you asked your lender for permission to rent the property out? They might say no.

Don't forget to register with HMRC for Self Assessment.

And read this thread which explains your legal duties as a Landlord:

http://forums.moneysavingexpert.com/showpost.php?p=41160642&postcount=12

cardiff_blue

oh dear, will try and change the title!

so regarding the TIC, if we informed HMRC that I owned 25% and my wife 75% then the rental income and therefore tax would be calculated accordingly?

I do believe I have made the common mistake you mentioned. I was under the impression that 40% tax came in at £35,000?

thanks for the reply very helpful !

00ec25

cardiff_blue wrote: »

Also, as far as Capital Gains Tax goes, am i correct in thinking if the property makes a gain of £10,000 in year one, and £10,000 year two, then my Capital gains tax allowance of £10,000 a year means i wont pay any CGT if i were to sell ? ( I realise these figures are highly unrealistic, and are just as an example!)

no ,

you have completely misunderstood it, It is not an annual allowance, it is a personal allowance in the year of sale only, it is not cumulative.

if the property gains £20k then you get relief of £10k and will be liable for tax on 10K at either 18% and/or 28% depending on your total income (ie Income tax liable income plus CGT liable "income") in the year of sale

as UK tax is on the individual then you and your wife will be taxed on your respective shares of the gain

sticking with a £20k total gain then

a) under JT you each have a gain of 20/2 = 10 K so no liabilty as covered by personal allowance

b) under TIC if the split is lets say 60/40 then your gain is 12,000 leaving you with 2K liable to CGT whereas your wife has 8,000 gain leaving her with no tax and an unused 2 k of gain which cannot be transferred to you.

This is why ownership portions in TIC have to be managed, you can change them at any time as transfer between husband and wife are CGT free so you have a split which favours the lowest rate tax payer whilst let out to minimise income tax, then when you are selling you change to ensure that both personal allowances are fully used up. Be careful however as HMRC are wise to that trick so the change has to be made well in advance of selling (say at least 1 year to be really safe). Never do it once the property is marketed for sale as HMRC can the set aside the split as its done only to avoid tax

00ec25

cardiff_blue wrote: »

so regarding the TIC, if we informed HMRC that I owned 25% and my wife 75% then the rental income and therefore tax would be calculated accordingly?

Income tax
you calculate the net profit for the entire property then you split that figure 25% husband, 75% wife,
you must have registered the Form 17 with HMRC before you do this otherwise HMRC will simply tax you both 50/50

CGT
as above gain split 25/75, Personal allowance (£10,900 at 12/13 rate) applied by each person to their individual share. CGT payable by each person if resulting figure >0 for each person

remember if 25/75 split means there is unused allowance then change the split as transfers between spouses are free for CGT purposes but must not be obviously done only to avoid CGT, therefore, for a short period it may mean the income tax bill is no longer as harmonious as it was when it was say 25/75

ACG

I was sat down with a pretty clever bloke the other day, he said its possible to say 99% of the income is one persons and 1% is the other persons - i would need to ask him how/what needs to be done but im pretty sure its just a form with HMRC. Might be best speaking to an accountant.

00ec25

cardiff_blue wrote: »

so regarding the TIC, if we informed HMRC that I owned 25% and my wife 75% then the rental income and therefore tax would be calculated accordingly?

Income tax
you calculate the net profit for the entire property then you split that figure 25% husband, 75% wife,
you must have registered the Form 17 with HMRC before you do this otherwise HMRC will simply tax you both 50/50


as suggested aby Joolz m, if you want to avoid income tax then gift property to wife so she owns 100% , she then gets all income may or may not have a taxable profit. Best not to receive income into a joint account though, but once she's got it then she can transfer money from her account to yours / joint account without problem.

at a future date she then gifts some of it back to you so you are TIC when it comes to CGT exposure

CGT
as above gain split 25/75, Personal allowance (£10,900 at 12/13 rate) applies by each person to their individual share. CGT payable by each person if resulting figure >0 for each person

remember if 25/75 split means there is unused allowance then
change the split as transfers between spouses are free for CGT purposes but must be done so it is not obviously done only to avoid CGT, therefore for a short period it may mean the income tax bill is no longer as harmonious as it was when it was 25/75 (or 0/100 if you gifted your 25% to her and she has now reversed that for the sale)

00ec25

ACG wrote: »

I was sat down with a pretty clever bloke the other day, he said its possible to say 99% of the income is one persons and 1% is the other persons - i would need to ask him how/what needs to be done but im pretty sure its just a form with HMRC. Might be best speaking to an accountant.

if you are married then the rules are as stated in my first post. This Q comes up regularly and the links to HMRC are easy to find if you want it from the horses mouth , your clever bloke can alter the shares only as long as the Land Registry Records tie up with it because HMRC will check

if you are not married then the rules are different and your clever bloke may be useful in that case so he sets the declared portions to minimise each person's individual tax exposure. 99/1 is pretty pointless in that case unless there is a compelling reason that the 1% person must maintain a continuous ownership - typically that applies where the property being let was previously the marital main residence so that, crucially, right to claim letting relief by the 1%er is carried forward.

OP has not stated what the property was
- if was is in fact the ex martial main home then further more specific CGT advice can be given as this is also a common question.

- If it was the ex home of one before the marriage and the other never lived in (as co owner) pre marriage then the situation is unchanged.

cardiff_blue

00ec25 wrote: »

BTW - just in case you have made a common mistake seen on the boards you do realise that 40% tax starts at £41,450 not "35,000" ie personal allowance 9,440 + 20% band 32,010 = 41,450

From what I can find on the HMRC website shows the limit for 2013 to 2014 to be £32,011 am i missing something?

ACG

He is indeed married and i imagine what you said (i havnt read your initial post) was correct.
Your reply makes him seem not so clever anymore (although there were a few other little nuggets i got from him too).