BTL Remortgage predicament

pavvers

Hoping for some clarification and advice on this!

Situation is that my dad and I co-own a rental property (privately, not through a company).  Value around 300k and we owe 150k. Both our names are on the deeds and we have a joint mortgage which has worked fine since the purchase in 2015.  Our current fix of 2.35% ends on 31st July and when it does, we would like to borrow more money to release some equity from the property, upto a maximum of 70% LTV ~210k.

The issue is that I am a higher rate tax payer (dad is basic rate) and so stress tests are more stringent. However, since the government changed the way that rental income is taxed, we have had our tenants pay the rent to my dad's own bank account and he then "pays" me my half of the rent, after the mortgage has been paid, which amounts to less than £3k per year and therefore is within the amount that he can giveaway tax free.  As far as I can see, there is no issue with doing this?

What we would like to do is get the new mortgage in my dad's name only, as he is the one (on paper at least) who is receiving the income and it avoids the lender applying stricter stress tests because one of the borrowers is a higher rate tax payer when in reality, I don't pay the tax.  We pay 20% tax, pay the mortgage, and split the remainder 50:50.

Because the interest rates have gone up, it has become apparent that borrowing more will be severly restricted by the fact that there's a higher rate tax payer on the application, hence wanting to do it in my dad's sole name.

I filled in an online form with London & Country who phoned my dad today and said that because of the way we handle the tax situation, that they could not offer us a mortgage.  My dad asked "is it illegal then?" to which the guy replied that he "could not comment"

We're really not trying to "get one over" on the government, I genuinely thought that what we do is perfectly legitimate.  We should comfortably be able to get another joint mortgage to cover the 150k that we owe, we're just a bit snookered by the requirement to borrow extra.

So, is it possible for one owner of a joint property to get a mortgage just in their name?  If it requires consent from the other then that's obviously a given!  And, is what we do illegal?!  Surely I can "opt out" of receiving an income from the property?  I wasn't aware of a stipulation that says both (or multiple) owners must take equal shares of the income?

Sorry for the long post but it's obviously a reasonably complicated situation which needed explaining. Look forward to hearing your views and advice.

Brie

I would have thought that you receiving a portion of the rental income makes it that exactly, income.  And therefore taxable.  I'm not sure what this has to do with dad giving something to you away "tax free" unless you're confusing this with inheritance tax which is something else completely.  So I'm not surprised that a mortgage company might want to distance themselves as it does seem a bit of a dodge.

Going forward I would have thought that you would have to sell your portion of the property to your dad so that the mortgage and the deeds were all in his name only.  That could very well involve you having to report capital gains and be taxed on that.  Might be stamp duty as well, and solicitor's fees.  

TonyMMM

pavvers said:

The issue is that I am a higher rate tax payer (dad is basic rate) and so stress tests are more stringent. However, since the government changed the way that rental income is taxed, we have had our tenants pay the rent to my dad's own bank account and he then "pays" me my half of the rent, after the mortgage has been paid, which amounts to less than £3k per year and therefore is within the amount that he can giveaway tax free.  As far as I can see, there is no issue with doing this?

I think HMRC would strongly disagree.

BoGoF

Seems you are trying to get one over by 1) not splitting the rental income 50/50 and 2) if I'm reading it correctly your dad isnt't paying tax on the full rental income that you have (probably incorrectly) decided he should get and you are under the incorrect assumption that he can gift you half back and he only pays tax on the half?

It doesn't matter whose account the rent gets paid into it should normally be treated as 50/50

pavvers

Well this is honestly news to me.  The 3k I'm referring to is

"Annual exemption

You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.

You can carry any unused annual exemption forward to the next tax year - but only for one tax year.

The tax year runs from 6 April to 5 April the following year."

Taken from gov.uk - it does fall under the inheritance tax heading but as the name suggests (at least to me) it is an exemption from it.  I'm not receiving an income, my dad is gifting me the money.

As for selling my half, that's just a non-starter due to CGT and stamp duty etc.

I'll put some numbers on the rent just to clarify:

Rent is £1000pm. 20% tax paid on that amount leaving £800.  Mortgage payment is £312, leaving £488.  Half of this is £244pm or £2928 per year.  This will obviously drop significantly anyway as the new mortgage will cost more per month regardless of how much we borrow.

BoGoF

Seriously, get yourself an accountant or tax advisor to unwind the tax mess you have created. Inheritance Tax gifts are nothing to do with Income Tax.

pavvers

I will add that in the beginning, we did everything exactly down the middle and I paid my 40% tax on my half.  But as the government phased in the new rules and put many landlords in a position where they would be making a loss year after year, we decided to do this instead.  It doesn't sit well with me morally, but I really didn't think it was against the law.  Many couples have both names on a house but only one earner to get a mortgage - I don't see the difference?

pavvers

Nothing to do with the tax bit, I meant why can my dad not got a mortgage on his own for a jointly owned property?

TonyMMM

Is it jointly owned or as tenants in common  ?

BoGoF

pavvers said:

Nothing to do with the tax bit, I meant why can my dad not got a mortgage on his own for a jointly owned property?

Then it wouldn't be joint?

pavvers

It's joint tenants, I always have to look up the definitions ad can never remember which is which!  The tenants in common definition sounds like it might be the better option?

Yes, thanks, I'm aware the mortgage would no longer be joint.  That was the whole aim but the response we got from L&C made it seem like we were forced to have a joint mortgage, hence this thread.