Reducing tax on rented out property

Pennywise

For completeness, the exemptions etc only apply to legally (under UK law) married/civilly partnered couples. They don't apply to "common law" marriages nor marriages in other countries which havn't be ratified by a UK marriage/civil partnership. May not apply to you, but people do get caught out when they think of themselves as married and refer to themselves as married, but in UK law aren't!

lesshaste

00ec25 wrote: »

meaningless...

do you own as joint tenants?

or

do you own as tenants in common?

We are joint tenants.

lesshaste

Pennywise wrote: »

For completeness, the exemptions etc only apply to legally (under UK law) married/civilly partnered couples. They don't apply to "common law" marriages nor marriages in other countries which havn't be ratified by a UK marriage/civil partnership. May not apply to you, but people do get caught out when they think of themselves as married and refer to themselves as married, but in UK law aren't!

We are definitely legally married

lesshaste

SDLT_Geek wrote: »

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.

Thank you. Do we have to ask the mortgage company's permission for this?

00ec25

lesshaste wrote: »

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

lesshaste wrote: »

We are joint tenants.

OK, a very common misunderstanding. In law you each own 100% of the property. You do not own 50/50 as joint tenancy means it is impossible to split the property into shares.

https://www.gov.uk/joint-property-ownership

in order for your plan to work you will need to convert to tenants in common as only then are you able to own an identifiable share of the property and of course vary that share as you wish. Don't forget you will need to do a Form 17 and a revised declaration of trust each time you change the respective share holding

also bear in mind that as tenants in common you must revise your wills to ensure your respective shares of the property go to who you want them to - see link above.

00ec25

lesshaste wrote: »

Also, if we then later sell the property, will this change the capital gains tax we have to pay?.

CGT is based on the share you own at the point of sale.

Bear in mind that the sort of income shifting you are planning to do is a very common activity and there are some very clear hurdles that have been established in case law in relation to tax.

For CGT, if you own 95/5 then that is what you get taxed on. That may well make sense if the 95% person is in a different tax bracket to the 5% person, but if by the time of sale you are both in the same bracket it is usual to remove the large disparity by reverting back to a more level share. if you do so be aware that HMRC has the power to set aside such a change if it was done just before sale and therefore was done only for the purposes of reducing CGT. In simple terms you need to make the final ownership change a decent amount of time before putting the property on the market for sale. That of course shows that for a period one of you pays more tax than they did before on their share of the rental profit, so there can be no claim by HMRC that the change was purely to reduce tax!

lesshaste

00ec25 wrote: »

OK, a very common misunderstanding. In law you each own 100% of the property. You do not own 50/50 as joint tenancy means it is impossible to split the property into shares.

https://www.gov.uk/joint-property-ownership

in order for your plan to work you will need to convert to tenants in common as only then are you able to own an identifiable share of the property and of course vary that share as you wish. Don't forget you will need to do a Form 17 and a revised declaration of trust each time you change the respective share holding

also bear in mind that as tenants in common you must revise your wills to ensure your respective shares of the property go to who you want them to - see link above.

Thank you. That seems a clear conclusion.

Can I go back to the possibility of my wife just charging me a management fee please too (say 12% of the rent). Do we have to change anything to make that legal?

00ec25

lesshaste wrote: »

Can I go back to the possibility of my wife just charging me a management fee please too (say 12% of the rent). Do we have to change anything to make that legal?

answered in point 2 of post 2 above by Pennywise

your wife's tax return may never be selected for inspection, but if it were she would struggle to justify anything like a useful size of income from managing a single property, even if she is not also its owner.

the idea that she could charge the same % as a commercial letting agent would be ridiculous, she does not have to fund staff, an office, advertising and all the other business overheads that a commercial operation would have.

lesshaste

00ec25 wrote: »

answered in point 2 of post 2 above by Pennywise

your wife's tax return may never be selected for inspection, but if it were she would struggle to justify anything like a useful size of income from managing a single property, even if she is not also its owner.

the idea that she could charge the same % as a commercial letting agent would be ridiculous, she does not have to fund staff, an office, advertising and all the other business overheads that a commercial operation would have.

That's very interesting, thank you. I don't think of prices in terms of the costs to the seller (as it were) but in terms of the advantage to the buyer. In other words, estate agents charge 12% because that's what it's worth to the landlord not because of how much it actually costs them (which may be near nothing in terms of management in some years). But what's important here is what HMRC thinks as you suggest.

00ec25

lesshaste wrote: »

That's very interesting, thank you. I don't think of prices in terms of the costs to the seller (as it were) but in terms of the advantage to the buyer. In other words, estate agents charge 12% because that's what it's worth to the landlord not because of how much it actually costs them (which may be near nothing in terms of management in some years). But what's important here is what HMRC thinks as you suggest.

you are comparing chalk and cheese

the relative profitability of a given business's price v cost equation bears no relation to what you are asking about, which is how can I divert some income from the highly taxed me to the lesser taxed her.

That is why HMRC can draw on settlements legislation to say that the income received by her is in no way commensurate with the work she did, and therefore that income is purely a figure invented to avoid tax, and hence falls foul of said settlements legislation.

claiming that she is "entitled" to 12% commission won't wash because such commission is based on the fact it has to cover all sorts of overheads that she simply does not have. The fact that "the market" is willing to pay 12% (which is high even for a fully managed service BTW) does not give her an entitlement to say that is the same rate I can be paid in order to avoid him paying tax.