Reducing tax on rented out property

lesshaste

My wife and I jointly own a property we rent out. As we both earned roughly the same amount, we both paid roughly the same amount of tax on this rent. As my wife is about to stop work, and therefore stop earning, we want to see if we can reduce the tax we pay on this rented out property.

As far as I can tell from reading online, our options are:

a) Use Form 17 to move most of the beneficial ownership to my wife. This mean that 95%, say, of the rent would go to her, reducing our tax burden. However I don't understand if this comes with serious downsides. I read online that we would have to pay stamp duty at 3% and in any case the mortgage company would have to agree. Is that right?
b) My wife charges me a management fee for managing the property. Is this possible and if so, how do you set this up so it is legal etc?

Any help hugely appreciated.

Pennywise

1. Rent would be taxed according to ownership, the downside being that your spouse would be the legal owner of 95% of the property so a big risk in case of marriage failure etc.

2. She'd only be able to charge a market rate for the time spent managing, which is likely to be a very small amount compared to rental income. Even if she spent a day per month which is very high for a normal property let, it's only 12 months at say 6 hours, so 72 hours at £20 is only £1,440 per year. (HMRC may not even allow her to be self employed managing effectively her own property!).

I can't comment on stamp duty but I have heard that it can be chargeable on transfers of ownership shares, so that's something you'd have to consult a solicitor about.

Yes, changing ownership share is something the mortgage company needs to agree to.

00ec25

if she is already a party to the mortgage on the property and "you" are not looking to increase the mortgage, then there is neither any SDLT to pay, nor any need to seek permission form the lender, for a change in relative shares between husband and wife

lesshaste

00ec25 wrote: »

if she is already a party to the mortgage on the property and "you" are not looking to increase the mortgage, then there is neither any SDLT to pay, nor any need to seek permission form the lender, for a change in relative shares between husband and wife

Thank you that is very interesting!

If we then sell the property at some point, are there capital gains implications from my wife having 95% of the beneficial interest in the property? Also, why do people set it at 95% and not, 100% for example? I don't really understand the consequences.

In reply to the other comment, I was assuming it is reasonable to charge the same management fee that any estate agent would, i.e. around 12% of the rent.

lesshaste

Pennywise wrote: »

1. Rent would be taxed according to ownership, the downside being that your spouse would be the legal owner of 95% of the property so a big risk in case of marriage failure etc.

For the purposes of any divorce settlement (not that we have any intention of getting divorced), aren't all our assets considered jointly? I mean, if I 100% owned the property I would assume it would still be split in half by default in any divorce agreement.

Pennywise wrote: »

2. She'd only be able to charge a market rate for the time spent managing, which is likely to be a very small amount compared to rental income. Even if she spent a day per month which is very high for a normal property let, it's only 12 months at say 6 hours, so 72 hours at £20 is only £1,440 per year. (HMRC may not even allow her to be self employed managing effectively her own property!).

As I commented to the other reply, can't you charge whatever an estate agent would charge for managing the property?

Pennywise wrote: »

I can't comment on stamp duty but I have heard that it can be chargeable on transfers of ownership shares, so that's something you'd have to consult a solicitor about.

Yes, changing ownership share is something the mortgage company needs to agree to.

It looks like I need to get the definitive word on this question.

00ec25

lesshaste wrote: »

Thank you that is very interesting!

If we then sell the property at some point, are there capital gains implications from my wife having 95% of the beneficial interest in the property? Also, why do people set it at 95% and not, 100% for example? I don't really understand the consequences.

In reply to the other comment, I was assuming it is reasonable to charge the same management fee that any estate agent would, i.e. around 12% of the rent.

for a married couple the implications of unequal ownership revolve around whether the property was ever occupied as a main residence.

a married couple can alter the ownership % as many times as they want, as often as they want, it is called no gain, no loss

however, in the circumstance where a property was previously lived in by one person before marriage, or has never been lived in by both after marriage, if a spouse is made an owner and that spouse has never lived in the property whilst at the same time being an owner of it, there are huge CGT implications

if it was once an owner's main residence then that owner gets to claim private residence relief (PRR) and letting relief - if applic. The key thing though is a spouse who was not an owner does not "inherit" such a claim from the transferring spouse, if that person has never personally lived in the property whilst an owner. On that basis 99/1 is done so the 1% owner does not lose a claim to PRR. If they do 100/0, then the claim is lost forever if the property is subsequently transferred back to co-ownership and then sold.

00ec25

lesshaste wrote: »

It looks like I need to get the definitive word on this question.

you could just google "mortgage and SDLT" ...
https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm04040

SDLT is based on "chargeable consideration"

in the case of an ownership transfer an outstanding mortgage is consideration. If there is no mortgage, and no cash changes hands outside of a mortgage, there is no consideration. So a pure gift of a share of a property from husband to wife is SDLT free if no mortgage, or is liable (subject to the SDLT thresholds) to SDLT if there is a mortgage

if 2 people are liable for a mortgage then their underlying ownership shares of the property drive their liabilty for SDLT.

if only one person is liable for the mortgage and where a share of the property is transferred to another person, that person will become liable for the mortgage so "consideration" has been given and SDLT is due - if above the relevant threshold

examples...
https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm04040a

SDLT_Geek

00ec25 is right in pointing out that a proportion of the mortgage debt is likely to count as chargeable consideration for the transfer of the share.

At least in the case of a transfer between spouses the higher rates of SDLT should not apply, this is as a result of the changes made on 22 November 2017. That is the case even though the property is rented out.

lesshaste

Thanks but I am still a little confused, apologies. My wife and I bought the house together, so own it jointly 50/50, and we both lived in it before moving out and renting it out to others. We are both named on the mortgage which is worth around 200,000 pounds currently.

If I transfer 95% of the beneficial ownership to her, will there be stamp duty to pay in these circumstances? Also, if we then later sell the property, will this change the capital gains tax we have to pay?

It might be worth mentioning that we have a joint bank account so in effect the change in beneficial ownership has no impact on my/my wife's share of payment of the mortgage.

00ec25

lesshaste wrote: »

My wife and I bought the house together, so own it jointly 50/50,

meaningless...

do you own as joint tenants?

or

do you own as tenants in common?

SDLT_Geek

You start of with a 50% share and end up with 5%, so your wife acquires a 45% share. If the mortgage is £200,000 that means the chargeable consideration is likely to be 45% of £200,000 which is £90,000.


As the higher rates do not apply for transfers between spouses (at least where there are no other joint owners) there is no SDLT to pay, but a land transaction return should be made as the chargeable consideration is over £40,000.