Can I save paying 40% tax on my rental income?

rkaura

Hi,

I jointly own (50/50) a property with my wife which we rent out to someone, but my wife is a non-tax payer and I am a 40% tax-payer. Therefore, I have to pay 40% on my half of the rental, while my wife pays nothing (as the amount she earns does not go above her free tax allowance). Am I allowed to "gift" my half of the property to my wife, thus saving paying tax on my rental income, or do I have to "sell" my half of the property and thus incur capital gains tax on my half? If I am able to gift my half of the property, I could potentially save a lot of money. At most, my wife would have to pay a lower tax threshold (not 40%) on the amount that exceeds her tax allowance.

Any advice on this would be very much appreciated.

Regards,

Ricky.

Murdina

If you make your wife a bona fide outright gift of the property then from that point forward she will be taxed on all the income. She will also pay all the CGT on any gain. Probably best to involve a solicitor so that there can be no doubt that you have transferred beneficial ownership (which is what counts; it's not just a case of whose names are legally registered).
You can arrange to own the property in whatever split you want. For tax purposes, jointly owned H&W property is taxed equally unless you make a declaration that it is owned in the same, unequal shares, for both income and capital and that therefore you wish the income to be taxed according to those unequal shares. You do not have to do this, and sometimes it is better to own it unequally, but accept the equal tax treatment. This will not help you though but you might consider eg keeping 5% if you thought there was any genuine possibility that your wife might otherwise sell the property without your knowledge.

Innys

Murdina wrote: »

If you make your wife a bona fide outright gift of the property then from that point forward she will be taxed on all the income. She will also pay all the CGT on any gain. Probably best to involve a solicitor so that there can be no doubt that you have transferred beneficial ownership (which is what counts; it's not just a case of whose names are legally registered).
You can arrange to own the property in whatever split you want. For tax purposes, jointly owned H&W property is taxed equally unless you make a declaration that it is owned in the same, unequal shares, for both income and capital and that therefore you wish the income to be taxed according to those unequal shares. You do not have to do this, and sometimes it is better to own it unequally, but accept the equal tax treatment. This will not help you though but you might consider eg keeping 5% if you thought there was any genuine possibility that your wife might otherwise sell the property without your knowledge.

I don't think this is quite right - inter spouse transfers are free of CGT. Instead, she will end up paying CGT on the full increase in value over your purchase price, when she comes to sell it.

Voyager2002

Try calling the Inland Revenue enquiry line and asking them about this situation: you do not have to give your name, and could always give fictitious details if necessary. Anyway, when I faced this situation some years ago the revenue told me that we were free to decide which of us should receive the rental income, and be taxed accordingly. They did stipulate that once such a choice has been made, it cannot be changed later unless something has happened.

Anyway, my experience was more than a decade ago, so the rules have probably changed. However, it is still true that HMRC are the easiest people to ask for reliable information.

Mikeyorks

Innys wrote: »

Instead, she will end up paying CGT on the full increase in value over your purchase price, when she comes to sell it.

That, I think, was what was (intended to be) conveyed in the first reply.

Mikeyorks

rkaura wrote: »

Any advice on this would be very much appreciated.

Regards,

Ricky.

There's a very recent thread on this on just the previous page (and a link to an earlier thread embedded in it) :-

http://forums.moneysavingexpert.com/showthread.html?t=626301

simpywimpy

I also read in place in the sun mag today that the way cgt is calculated is due to change in 2008 as they are getting rid of the sliding scale and Im sure it said it will be a set rate of 18% rather than anything up to 40%