Owning a buy to let property and Tax

PierremontQuaker03

Ok, I own a BTL which has just happened recently, which was previously my main home. I am married but my name is only on the BTL property deeds.
With the income from this house it is going to take me into the 40% tax bracket so I am looking for the most tax efficient tax options, as I see it my options are:
1) Add my wife to the deeds to split the income 50/50
2) Gift the property to my wife
3) Set up a company relating to the property.

I am a CIMA qualified accountant but personal taxation is not my area of expertise, although I would like to learn more about this.

Option 1
So the way I see it for option 1 this is the easiest way forward in the short-term. I have just taken a 2 year mortgage deal out on the BTL property so would adding my wife to the deeds affect this mortgage - I assume I will have to nofify the mortgage company to the change in the deeds?

Option 2
This would be a good option but I need to know the implications again with the current mortgage - my wife does not earn a lot and if she applied for a mortgage she would not get one - but I suppose I could be guarantor?

Option 3
Setting up a company could be another good option as I could potentially take more costs and rather than pay 40% tax I would pay much less.

Just wondering if anybody has gone thru the above and what the best way forward is.

Thanks for any advice

Davide123

Option 3.
Will you need to take money out of the company? If yes, then might not be worthwhile, as you would be paying tax twice, in to company and then out to you

PierremontQuaker03

Regarding Option 1 - after putting my wife on on the deeds can I do the following?:

1 - Have the property owned as Tenants in Common (split 50:50).

2 - Have a Declaration Of Trust established by a Solicitor that says although you own 50% of the property, you hold 49% on trust for your wife. (So that your wife holds 99% of both the income and the capital.)

3 - Complete Form 17 to declare the uneven split of interest in the property.

anselld

PierremontQuaker03 wrote: »

Regarding Option 1 - after putting my wife on on the deeds can I do the following?:

1 - Have the property owned as Tenants in Common (split 50:50).

2 - Have a Declaration Of Trust established by a Solicitor that says although you own 50% of the property, you hold 49% on trust for your wife. (So that your wife holds 99% of both the income and the capital.)

3 - Complete Form 17 to declare the uneven split of interest in the property.

No. Form 17 declaration for a married couple can only match the actual ownership split.

CLAPTON

option 1+ 2 probably are a disaster
although they will save a little income tax they will increase your eventual cgt

jimmo

You probably need to consider the likely effect on Capital Gains Tax.
As you have lived in the now BTL property you qualify for main residence relief in respect of your period of occupation and the final 18 months of ownership. You will also qualify for lettings relief, current maximum £40,000.
http://www.hmrc.gov.uk/helpsheets/hs283.pdf
Note that the helpsheet in the link above is the latest available but relief for the final 3 years of ownership is to be reduced to 18 months next April.
If you give a share of the property to your wife you will be deemed to have sold the gifted share to her for the appropriate proportion of your original cost.
When the BTL property is sold you will still qualify for main residence relief on any proportion that you have retained but your wife will not.
That is because she will not have lived in the property at any time during her period of ownership.
It rather depends on how long you have owned the property, how much its value has increased and the anticipated profits from letting but effectively discarding a proportion of your entitlement to main residence relief could cost a lot more than the potential Income Tax savings.
If you “sell” the property to your company that is deemed to take place at market value but you may not be “selling” a house with vacant possession. Your capital gain will almost certainly be covered by main residence relief but when the company sells the property, either back to you at market value (with or without vacant possession), or on the open market, its capital gain will be chargeable to corporation tax and there will be no relief available.
In my time at HMRC as a capital gains specialist I never saw even one instance of a person creating a company to handle a single let property. So it may not be the greatest idea.

getmore4less

You started business(with financing) without understanding the profit it could make!

WHY?

The main offsets to income are finance costs(interest) and running costs with these offset will you still be 40%

Dead_keen

Don't forget stamp duty. This can be relevant if you gift to your wife (e.g. if there is a mortgage on it) or you sell it to your own company (e.g. to allow it to be geared up).

MarkBargain

I'm in a very similar position this year, so plan to pay 40% tax on my rental income (after maintenence and insurance expenses) as it keeps things simple and seems the right thing to do.

holly_hobby

There is a very recent and very similar thread .... which may be beneficial for understanding ... https://forums.moneysavingexpert.com/discussion/4853353

PierremontQuaker03 wrote: »

Ok, I own a BTL which has just happened recently, which was previously my main home. I am married but my name is only on the BTL property deeds.

With the income from this house it is going to take me into the 40% tax bracket so I am looking for the most tax efficient tax options, as I see it my options are:
1) Add my wife to the deeds to split the income 50/50

The most beneficial way (if she is a lower tax payer than you), would be to add her to the deeds, under a tenant in common basis, weighting the ownership in her favour (ie 99/1), which means that your rental receipts will be delcared and taxed under the same proportions (following completion and submission of HMRC Form 17

If there is a mortgage and she isn't paying you anything else, and the os debt exceeds 250k she will be exposed to SDLT on the transfer, as where mortgaged (in addition to any other consideration), HMRC will assume the basic consideration to be equal to 50% of the os mge being transferred - and as SDLT nil rate threshold is currently 125%, this is where the 250k mge comes into.

However, she would have not PRR exemptions on disposal, and you would only have PRR to your share ... so you need to think very carefully as to if saving some IT now, will cause you a whole load of heartache later on re getting your gross gain down for CGT purposes (which would include PRR & last 18 mths regardless of residency, & max 40k lettings relief & standard offsetting as costs, cgt allowance, prev reported losses, etc, etc).

As even if she isn't added to the deeds to get IT down, she can probably easily be cited as a beneficial owner (which is whats relevant for cgt purposes), even in the absnce of FORM 17, by such actions as her receiving and declaring rental under own name, sharing running costs, sharing of funds on disposal (list no exhaustive).

PierremontQuaker03 wrote: »

2) Gift the property to my wife

There is no cgt as its deemd as no gain or no loss transaction for couples deemed as living together. But see above re loss or PRR etc

If its mortgaged you can't as the debt is in your name, you could do a convuluted transfer of equity (her on) and and subsequent TOE (you off), butshe would need to meet min income and status requiremens under any BTL, and this wouldn't avoid SDLT, as even if the 50% share is under SDLT, you later coming off, is a linked event for SDLT purposes.

PierremontQuaker03 wrote: »

3) Set up a company relating to the property.

If its not mortgaged, yes possible to set up a ltd co and hold it within, if its not, forget it, as this market has all but dried up.

Holding the prperty under the company means you will ose your PRR relief and CGT allowance (for all beneficial owners).

Plus if the company is wound up, and you want to retain the property, you will have to pch it from the company - which may or may not permissible given your status at the time.

PierremontQuaker03 wrote: »

Option 1
So the way I see it for option 1 this is the easiest way forward in the short-term. I have just taken a 2 year mortgage deal out on the BTL property so would adding my wife to the deeds affect this mortgage - I assume I will have to nofify the mortgage company to the change in the deeds?

She needs to be assessed by the lender, and only if they agree can she be added.

TOE circa £500

Possilble SDLT issues as already discussed.

For CGT on disposal, her acquistion price will be equal to that you paid, to which she can apply associated costs, prev reported cgt losses and her own unused annual cgt allowance.

PierremontQuaker03 wrote: »

Option 2
This would be a good option but I need to know the implications again with the current mortgage - my wife does not earn a lot and if she applied for a mortgage she would not get one - but I suppose I could be guarantor?

Most BTL lenders whom have the min income, cite this as 25k, so as you're already in receipt of this, adding her won't be prejudiced by her lack of income. Although to later take you off (refer above re your gifting idea) may well be.

PierremontQuaker03 wrote: »

Option 3
Setting up a company could be another good option as I could potentially take more costs and rather than pay 40% tax I would pay much less.

Discussed above - not recommended for a 1 property /small portfolio.

I would imagine within your practice you have personal tax practitioners whom you can bounce off, but the above are some basics to get you started.

As you are already a tax adviser, you'll readily understand HMRC guidance ... here's tsf of property between partners - http://www.hmrc.gov.uk/helpsheets/hs281.pdf

Hope this helps

Holly

Lokolo

- Keep the property in your name
- Have a ltd company which charges the Rent minus interest only interest
- You yourself then have no tax liability
- The ltd company then runs the business of running the property without actually owning it

Profit can be dividend out, saving you tax as a HRT.

(this isn't advice, but something to be aware of)