Rental Property

Lisa1978

Afternoon,


I bought a property in 2006 and lived in it for 2 years. When I met my now husband, I began letting it out in 2008.


As from next month, I shall be moving into the higher tax bracket. My husband is a 20% tax payer.


To avoid paying higher tax on the property income should I put the property into both names? How would this work if I'm 40% tax payer and he is 20%? Would they still take 40%?


I am not intending to sell the property as it has been breaking even and we haven't had any problems. However, for CGT purposes, the same question, should I put asset into both names? We are 36 and 30 therefore I am not intending to sell for at least another 20 years, also there is still a mortgage on it for approx. 17 years. Maybe this question is irrelevant today but useful for future!


Thanks

CLAPTON

to put the property into joint name will require the permission of the mortgage lender


for tax on rent :
if you put the house in joint tenancy then HMRC will require you to share the rent 50-50 : you each need to make a separate declaration each year to pay the tax.

if you own at tenants in common you can apportion ownership in any ratio you like e.g. 80 - 20 and hence apportion the rental income in the same ratio

for cgt purposes it is normally considered unwise to split the property ownership as you have the benefit of PRR (private residential relief) and hence letting relief as you once lived there but he won't.

however to work this out you will need to tell us what you will sell the house for in 20 years time and what the cgt rules will be then

00ec25

you are married...it matters

mortgage
putting the property in his name means he cannot claim any of the mortgage cost against his share of the income unless he is also named on the mortgage.
the lender will have to agree to the change anyway , although assuming it is now a BTL mortgage this will be less of an issue than if it were still on residential mortgage terms

income tax
if you put the property into both names then the income must be shared 50/50 between you (so you pay 40% on your profit) unless you set it up as a tenancy in common with unequal shares (eg 99/1 in favour of the 20% payer) and notify HMRC of this fact using Form 17. No form and HMRC will continue to treat you as 50/50 irrespective of actual ownership arrangements

CGT
the mortgage is irrelevant for CGT
owning it together is advantageous when selling as the gain is split between you and you each get the personal tax free allowance (currently 11,000 at 14/15 rates)

because of marriage the transfer is on a no gain no loss basis meaning he inherits it at your original purchase cost from 2006

but as he never lived there as his main home then he will not inherit the private residence relief (PRR) nor will he get letting relief that you currently have because you did live there.

however, given the timescales you are talking about the size of the PRR is largely irrelevant because it simply gives you a proportion of your ownership tax free, eg: owned 20 years lived in for 2 you get 2/20 of the gain tax free
the letting relief is currently capped at £40,000 maximum

conclusion
over the next 20 years the rules could change dramatically so making plans now for CGT is a high risk strategy as it is very possible that the tax rate and letting relief will change.

so you should be looking at this short term with a view to income tax exposure, and in that respect there is a strong case for making him an owner to reduce the overall income tax take over the next 20 years provided the mortgage position is sorted

if you do put it into both names for income tax purposes then obviously that does establish CGT liability for both of you but worry about CGT details later as the (current) rule with marriage is you can transfer between spouses anytime and as many times as you like before sale so you can better plan for CGT closer to the event and react to any rule changes then. the single most advantageous thing you both can do to future proof your CGT position is to move into the property and live there as your main home so that he gets PRR and letting relief entitlement. Presumably that is not an option at the moment but if the rules remain the same then it is something you should do at some point in the next 20 years