BTL Remortgage predicament

silvercar

pavvers said:

I have done some more reading up on this situation.  I cannot post links but if anyone is interested enough, please paste the following into Google and read the article from the taxinsider website that come up:

If a property is owned jointly by two persons who are not married or in a civil partnership, the rental profit is not automatically split 50: 50.

Rather the income split is in whatever proportion they agree between themselves.

In fact; here's the example that they give:

Rose, Lily, and Poppy are sisters. They jointly own a cottage which they inherited from their grandmother in equal shares. The cottage is rented out, generating rental profits of £6,000 per annum.

 

Rose and Lily have graduated and are working. Poppy is a student. To help Poppy out while at university, they agree that Rose and Lily will receive 10% of the rental profits each, with Poppy receiving the remaining 80%. 

 

The split for tax purposes follows the actual split, so Rose and Lily are each taxed on profits of £600, while Poppy is taxed on profits of £4,800.

 

Practical tip

Where property is jointly owned, consider the optimal allocation of profits for tax purposes and whether this can be achieved given the nature of the relationship between the joint owners.

Thus, my father and I have decided that he receives 100% of the rental income.  It's not in writing, but it doesn't have to be.  And as I've stated in previous replies, he is legally entitled to gift me up to £3k per year.  I'm an only child so no jealous siblings to worry about!

I appreciate most of you were trying to help but were perhaps applying the rules of married couples.  I freely admit that I did not know there were different rules for a parent & child, siblings, group of friends etc but having read the above article I am satisfied that I/we are doing nothing wrong with regards to taxable income.

I do also appreciate that this has no bearing on the mortgage application.  We will have to have the tougher stress tests applied because of my higher rate income tax band, but that's a less bitter pill to swallow in the grand scheme of things.

If you also quoted the rest of the article a married couple can make a form 17 declaration to split ownership any way they want. 

Also, this legal entitlement to give £3k a year, isn’t accurate. There is no tax on gifts in the UK, he could legally give you £100k a year if he wanted. The £3k is for inheritance tax calculations, but most people don’t pay inheritance tax and even for those that do there are other allowances eg money paid regularly out of income.

pavvers

I didn't see the need to quote an irrelevant part of the article. We're not a married couple, we're father and son.  Elsewhere on the internet it explicitly states that form 17 is only required for a married couple.  We do not have any need or desire to change our ownership from 50:50, we can leave that alone and still elect to split the income at any ratio we choose.

OK, so perhaps I don't fully understand the rules around gifting, but the fact is, the amount we are talking about is less than 3k and will continue to be so in light of the mortgage amount going up from August.

Quite frankly, I am a bit pee'd off at the negative replies I initially had and a certain individual deleting some of their replies so now the thread looks like I've been having a conversation with myself.  I have researched the subject and proven that I/we are entitled to do exactly what I described in my first post.  Any of the well meaning but inaccurate advice I received would have cost me money in some way which kinda goes against the principals of a money saving expert forum.  I was repeatedly told I was in the wrong by people who spoke with great authority on the subject, but 30 or so minutes of research on the internet proved those people wrong.

As Elton John once said; Sorry seems to be the hardest word...

alanyau88

My advice mate is to pay for proper advice.  That is through a good accountant, IFA, or other tax advisor who is regulated by the FCA or other professional body.  

My personal opinion is that you're trying to avoid paying taxes and it could amount to tax evasion.  You don't want to be black listed with the lenders or have HMRC on your back so speak to a proper tax advisor and try not to rely only on your own online research.  

pavvers

I appreciate that having a professional opinion would absolutely clarify things for me so I will look into doing this.
The following is taken from document PIM1030 from the government website, I have highlighted in bold what I believe is what my previous findings were explaining, with the 3 sisters and the cottage being an example of this:

"Jointly owned property: no partnership

Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.

However, where the joint owners are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless:

• both entitlement to the income and the property are in unequal shares, and

• both spouses, or civil partners, must inform HMRC that their share of profits and losses is to match the share each holds in the property.

If a customer’s only income from land and property in the UK comes from a jointly owned property, that share alone will form the rental business. If a customer has other income from land and property in the UK, whether in their name alone or owned jointly with other people, their share from the jointly owned property will form a part of their rental business along with the other income and expenses on any other properties which they own alone. Once again, however, shares held in a different capacity (partner, trustee, executor) must be kept separate."

And yes, before anyone points it out, a married couple are treated as 50:50 for rental income and must declare otherwise to HMRC.  But, as I think I have already mentioned, my dad and I are not married.

MWT

pavvers said:

"But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed."

For safety, the bit I would want a professional opinion on is the connection between agreeing your father gets 100% of the rent and the agreement for him to gift you an amount equivalent to what your share would have been.

Sometimes it is the combination of things that add up to tax evasion rather than just looking at one part of the transaction...

pavvers

I have literally just sent an email to a financial adviser that my dad has used in the past.  In my opinion:

My dad has 3 incomes; state pension, DB pension & a buy-to-let property income.  He gets the £12570 tax free allowance as everyone does, and pays 20% tax on the amount he earns over that.  All of that money is his.  He also has some savings.  What he chooses to do with his money is up to him, his options include, but are not limited to:
1) Saving it
2) Spending it
3) Burying it in the garden
4) Sellotaping it to a horse
5) Gifting some of it to his son

Please don't take my options 3 & 4 as a sarcastic dig, I am just trying to use a bit of humour to demonstrate what I mean by it being his money to do what he wants with.  I take your comment on board and that of alanyau88 although his was slightly more sinister!  As I said, I have now sought a professional opinion on the matter.

K_S

pavvers said:

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.

@pavvers

Mortgage - As others have mentioned above, as long as the property is owned by both yourself and your father, you'll both need to be on the mortgage and hence any stress tests will consider you being an HR taxpayer. Having said that, assuming the numbers add up, the simplest solution to getting the mortgage you need would be to go for income-slicing/top-slicing which is where the lender uses surplus personal income to overcome any shortfall from the stress tests.

Not all lenders will do this, but there are a good number of mainstream lenders that will consider top-slicing (eg: Accord, Barclays, Platform, BM, etc.) subject to their specific eligibility criteria and affordability calcs. If you do speak to a broker, there is no real need to discuss your tax situation unless they ask as most brokers (including me) are pretty risk averse so will often steer clear if an arrangement sounds complicated.

Tax - I'm not a tax expert by any stretch of imagination but through my work have a working knowledge of how it applies with respect to property income. Here goes -

- deciding to split the rental income in whichever proportion without needed a Deed Of Trust: as I understand it there's nothing wrong in doing that if you aren't a married couple and can do it in whatever proportion your decide.

- however, the above brings the settlement rules into play which are anti-avoidance provisions that attack arrangements where the person giving the income away may still benefit. If the settlor does not benefit from the income given away, then it isn't caught by the settlements legislation.

- if the settlor have given away a right to income, but, due to the arrangements made nevertheless stand to benefit from the income given away, then the income will be treated as the income of the settlor, in effect undoing any potential benefit in the transfer.

Whether or not it applies to your specific scenario is a matter of judgement so I won't delve into that. I would strongly recommend putting a post on the tax part in the 'Cutting Tax' section on MSE Forum https://forums.moneysavingexpert.com/categories/cutting-tax as there are some really knowledgeable posters on there who will hopefully give you a clearer picture.

All the best, hope you get the mortgage you need.

pavvers

K_S - Thank you so much for taking the time to give such a detailed reply.  I fully understand that my name will need to be on the mortgage due to being an owner of the property.  To "get around" this element by selling my half to my dad not only creates an unwanted CGT liability (thus making it not worth it) but it also just complicates things for us in the longer term.  I won't mention why that is because clearly I have already upset some people on here so you'll all just have to take my word for it that it's not worthwhile for us.

I'd heard the term "top slicing" somewhere before but had no idea it's definition was so simple!  So it's like using a person's income in the same way as done for a residential mortgage, but the keyword being "surplus" income.  That is very reassuring to know; my dad's outgoings are very low and I am fortunate enough to have some money left over at the end of each month.

The chap from L&C saying that he "could not comment" was essentially the whole reason for starting this thread.  There's a certain irony that yourself and kingstreet are both mortgage brokers, and are the only people who have taken my question at face value and given me a straight answer!  Quite why the L&C guy couldn't have just said the same thing and said that we both need to be on the mortgage is beyond me...
I have since learned my lesson in that respect and contacted a local mortgage broker and essentially said "Hi there, my dad and I own a property together, could you look at what deals are available for commencement in August please?"

The tax element isn't as clear cut as I had assumed so I will take your advice and pop a thread on the "Cutting Tax" section of the forum; didn't even know that existed so again, thank you for that.

At the risk of being strung up or put in front of the firing range, I imagine that my dad paying a tradesman to do some work at my own house would be OK...
He's helping me renovate it, such is the good relationship the 2 of us have.

For those on the edge of their seats wondering what the IFA said...

"Thanks for your enquiry. It will be tax advice that you need here rather than financial advice therefore enquiries like this, we suggest you either speak directly to HMRC or to a qualified accountant.

We can help with the taxation of investments such as ISAs and Pensions but sadly cannot advise on property income taxation.

Sorry we cannot help on this occasion."

So it's back to the drawing board on that one!  Hopefully the helpful people who frequent the "Cutting Tax" forum will be able to assist.

In all honesty, if we get the new mortgage that we'd like, there will be so little money left each month from the rent that it's really not worth splitting it.

For those that have read this far I've thought of a couple of hypothetical scenarios to be pondered.  They're open to anyone, but are mostly aimed at those who persistently told me that I was wrong:

Scenario 1)

My dad and I own a rental property and elect to split the income from it at 50:50.  For the ease of numbers, we own it outright with no mortgage.  After tax, our £500 per person gross income leaves my dad with £400 and me with £300.  If my dad took pity on me and gave me £50 to balance it out between us (though also consider him giving me any amount of money) is that more acceptable now?  He only paid 20% tax on that sum of money after all, so I imagine that we're both still in the wrong for doing this.

Scenario 2)

You find some money in the street, any amount you want, could be a quid, 20, 1000 - anything. Do you:

a) Walk straight past it

b) Check no one is watching, pick it up and put it in your pocket

c) As b), but you contact HMRC at the earliest opportunity and inform them of the extra income you've had this year, and request that they tax you accordingly?

Yes, I am being a little childish, but I'm curious about how squeaky clean the average person is.

I appreciate the above scenarios have no bearing on my actual situation, I'm just putting them out there to put a different perspective on things.

noitsnotme

My accountant has always told me that if the only reason you are taking a certain action is to reduce your tax liability then it is highly likely that HMRC will not be very happy about it.

Your situation does seem to be exactly that, you are doing it for no other reason than to avoid paying higher tax on your share of the rental income.

It's potentially a very fine line between legal tax avoidance and something HMRC might frown upon.

I'm really not having a go, I've had some "great ideas" myself in the past on how to reduce tax but running them by my accountant has saved me from doing something silly.  I really recommend that you get some proper advice from someone qualified or HMRC themselves.  Better to find out now rather than HMRC finding out later.

MWT

pavvers said:

Scenario 2)

You find some money in the street, any amount you want, could be a quid, 20, 1000 - anything. Do you:

a) Walk straight past it

b) Check no one is watching, pick it up and put it in your pocket

c) As b), but you contact HMRC at the earliest opportunity and inform them of the extra income you've had this year, and request that they tax you accordingly?

Yes, I am being a little childish, but I'm curious about how squeaky clean the average person is.

I appreciate the above scenarios have no bearing on my actual situation, I'm just putting them out there to put a different perspective on things.

You missed option d) ... hand it in to your local Police Station ...

It is funny how often those engaged in some form of possibly questionable activity always claim everyone else is doing it too, when it really isn't the case, in my experience at least, having handed stuff into the Police on more than one occasion...

pavvers said:

At the risk of being strung up or put in front of the firing range, I imagine that my dad paying a tradesman to do some work at my own house would be OK...
He's helping me renovate it, such is the good relationship the 2 of us have.

As per the comment from Noitsnotme, if the motivation is the avoidance of tax then it probably isn't worth doing, if he would do it anyway regardless of having received more than his share of the rent then of course it is fine, but would he really... ?  ... that's the problem with tax avoidance schemes, you never really know if it is avoidance or evasion until HMRC get involved...