FHL Scotland - Transfer income to Wife (mortgage in my name)

Maley
Maley Posts: 7
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edited 9 December 2023 at 6:54AM in Cutting tax
I own a FHL property with ongoing mortgage in Scotland.
My partner and I (2 kids) are not married but would get married to qualify for this...
I work and pay tax etc, FHL is getting taxed considerably.  My partner / wife does not work, and looks after our kids.
Can I transfer the FHL income over to my partner / wife?
I have read that FHL profits can be split to the husband and wife’s beneficial interest.

Thanks

Comments

  • Jeremy535897
    Jeremy535897 Posts: 10,371
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    edited 9 December 2023 at 7:50AM
    It is true that married couples can transfer assets between themselves without a capital gains tax charge, and by transferring half a property to a spouse, half the rental income then belongs to the spouse. If you gave a spouse the whole of the property, all of the rental income would be taxed on her. If you own the property say 75:25, the income is taxed 50:50 unless an election is made to have the income assessed according to the actual shares owned.

    In the specific case of a FHL, or a partnership between the married couple (which is unlikely to be established where only one property is let), the income arising from a jointly held property can be divided between the married couple without reference to the percentage share owned by each spouse, but it would be sensible to evidence that, by paying 99% of the income into a bank account in your wife's sole name, and 1% into a bank account in your sole name.

    Finally, for an unmarried couple, it appears that income from a jointly held property can be divided between them as they choose, even though it does not reflect actual ownership. You could therefore transfer 1% of the property to your partner (on which there might be a small capital gain), but have her assessed on 99% of the income. Again I believe that it would be important to evidence that, by paying 99% of the income into a bank account in her sole name, and 1% into a bank account in your sole name.

    You should take legal and tax advice before making any decisions. I am not familiar with the Scottish legal system.

    See https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030
  • You could therefore transfer 1% of the property to your partner (on which there might be a small capital gain), but have her assessed on 99% of the income. 
    Would the settlement legislation then be relevant?
  • Jeremy535897
    Jeremy535897 Posts: 10,371
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    You could therefore transfer 1% of the property to your partner (on which there might be a small capital gain), but have her assessed on 99% of the income. 
    Would the settlement legislation then be relevant?
    It's an interesting question, but PIM1030 does not refer to it, and HMRC have shied away from trying to use the settlement legislation in connection with partnership profit sharing arrangements. So I doubt it, but as I said, proper professional advice needs to be taken.
  • You could therefore transfer 1% of the property to your partner (on which there might be a small capital gain), but have her assessed on 99% of the income. 
    Would the settlement legislation then be relevant?
    It's an interesting question, but PIM1030 does not refer to it, and HMRC have shied away from trying to use the settlement legislation in connection with partnership profit sharing arrangements. So I doubt it, but as I said, proper professional advice needs to be taken.
    I wasn't referring to a partnership but your comment: "Finally, for an unmarried couple, it appears that income from a jointly held property can be divided between them as they choose, even though it does not reflect actual ownership".
  • Jeremy535897
    Jeremy535897 Posts: 10,371
    First Post First Anniversary Name Dropper
    Forumite
    You could therefore transfer 1% of the property to your partner (on which there might be a small capital gain), but have her assessed on 99% of the income. 
    Would the settlement legislation then be relevant?
    It's an interesting question, but PIM1030 does not refer to it, and HMRC have shied away from trying to use the settlement legislation in connection with partnership profit sharing arrangements. So I doubt it, but as I said, proper professional advice needs to be taken.
    I wasn't referring to a partnership but your comment: "Finally, for an unmarried couple, it appears that income from a jointly held property can be divided between them as they choose, even though it does not reflect actual ownership".
    My point though, relevant to the OP, is that if HMRC shy away from the settlement legislation regarding partnerships, it's unlikely they would apply it to a FHL. I am less confident about the situation for an ordinary rental property.
  • More_complicated_than_that
    More_complicated_than_that Posts: 151
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    edited 11 December 2023 at 3:28PM
    I don't have any experience of HMRC applying the settlements legislation where there really is a general partnership.  But jointly owning property is not the same as there being a partnership.  If someone gives away 99% of the income then there is clearly a settlement.  Whether the income is allocated to the settlor will depend on the facts. The settlements legislation is a self-assessment matter and so it is up to the settlor to decide whether to report any income rather than wait for HMRC to ask for it.  

    I think that professional advice would also need to include legal advice around the mortgage as transferring any beneficial interest in the property without consent is likely to breach the terms of the mortgage.  

    I have no idea how LBTT applies here. 

    As you mention, CGT would also be due if there was a gain on the deemed market value of what is given away.  In your 1% of capital and 99% of income away forever example you used, that could be a substantial proprtion of the deemed gain (not just the 1%).  This is because people would pay more than 1% of its value to get 99% of its income.  But I have no idea how much as I have no idea what Scottish property law says about the ability for one of the owners to sell a property against the wishes of another.
  • Jeremy535897
    Jeremy535897 Posts: 10,371
    First Post First Anniversary Name Dropper
    Forumite
    I don't have any experience of HMRC applying the settlements legislation where there really is a general partnership.  But jointly owning property is not the same as there being a partnership.  If someone gives away 99% of the income then there is clearly a settlement.  Whether the income is allocated to the settlor will depend on the facts. The settlements legislation is a self-assessment matter and so it is up to the settlor to decide whether to report any income rather than wait for HMRC to ask for it.  

    I think that professional advice would also need to include legal advice around the mortgage as transferring any beneficial interest in the property without consent is likely to breach the terms of the mortgage.  

    I have no idea how LBTT applies here. 

    As you mention, CGT would also be due if there was a gain on the deemed market value of what is given away.  In your 1% of capital and 99% of income away forever example you used, that could be a substantial proprtion of the deemed gain (not just the 1%).  This is because people would pay more than 1% of its value to get 99% of its income.  But I have no idea how much as I have no idea what Scottish property law says about the ability for one of the owners to sell a property against the wishes of another.
    I think you are overcomplicating it. In a partnership, you can share income profits and capital profits in different ratios, and you can with a FHL.
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