Do i have to pay Tax on rental income?

chiefmissile

My wife and i are moving to military rented accommodation in march 05, at present we live in our own house, the mortgage in my name only. My wife is having a baby and intends to give up work to be a full time mum, i am planning to rent our house out while we are away, with all rental income paid to my wife's seperate bank account, i will still be paying the mortgage. The mortgage is a repayment one, which cost £800 per month for 15 years, the reason it is so big is because we borrowed some equity to fund a property in Spain. We have been told that we can rent our house for £800 per month, has anyone got any idea about the tax payments in our case?

MarkyMarkD

Yes, you would, but not much.

You can offset the mortgage interest (not the total repayments) against the rent.

If I was you, I would transfer the house into joint names and then elect that it's held disproportionately (e.g. 99% by her) and you will only pay tax on 1% of the rent (net of mortgage interest and other costs).  There's an Inland Revenue form to do this:
http://www.inlandrevenue.gov.uk/pdfs/form17.pdf

Probably not much effort to get the house transferred (and the mortgage).

The fact the income is paid into her account makes no difference - you own the house, so you would have to enter into the tenancy agreement and the income would be yours.

This is all assuming that you trust her!  But honestly, if you are married, it makes no difference anyway.

Robert_Sterling_3

I think that MarkyDMark may well know a lot that I do not know.

I only write from an amateur point of view and so you are more than welcome to disregard my view.

I think the gorvernment has had a new look at Form17.

The form talks about who is or isn't the beneficial owner.
It does not make clear, to me at least, what it means to be the beneficial owner and it even states that it will not tell you who the beneficial owner is.

It sounds to me as if you are at present.
I am surprised that you and your wife are neither Joint Owners or Tenants in Common.
I would certainly advocate moving to one of those two forms of ownership.

I think the 99% and 1% split looks "well dodgy".
I could be wrong and if I am it will not be the first time.

Does your employer offer any advice in this area?

JayneH_3

My husband and I looked at the tax election form, and it states that the property has to be actually held in unequal shares in order to elect to tax proportionately. So chief missile would have to hand over 99% of the property to Mrs chief missile.

MarkyMarkD

Yes.

But as I say, that makes no difference if you are married in any case. (I.e. if you were to split up, it wouldn't matter who actually owned each asset whilst married - the settlement would pool the assets and divide them up in the same way irrespective).

There's nothing at all dodgy about 99%:1% - you can give your wife anything you like, free of tax (income, capital gains and inheritance).

If you consider it worth the tax saving, I should speak to a solicitor about switching to joint ownership - the two forms of which RS PR has described - and configuring things such that ownership is split 99%:1% or whatever.

You would also need to instigate a transfer of equity with your mortgage lender which they will charge for, although the solicitor could cover the legal work for this at little extra cost at the same time as transferring the property.

It very much depends on cost-effectiveness: if your £800 per month mortgage is in fact £600 interest and £200 repayment (say) then you are talking about £2,400 of taxable income in your name - or £0 in your wife's - which might save you around £1,000 a year in tax at 40%. If those figures apply to you, I suspect that the year 1 cost of the transfer will be far less than the annual tax saving.

I speak from the position of buying my wife a house as an investment property - 100% in her name - because she pays no tax. I'm happy to do that for the reasons I've described above - I don't believe that it makes any difference from a divorce point of view (not that I'm planning it in any case). The only benefit of the house being jointly owned is that the mortgage has to be in the same names as the house ownership, and I presume she wouldn't get a normal mortgage on the property with no income. You also have the marginal benefit of control - if you both own, she can't sell it without your consent AFAIK.

chiefmissile

Thanks everyone for taking the time to give me some advice, it sure is nice to know that there are some top people still left in this tax ridden country. ;D

Plumpud_3

It doesn't matter who owns the property, it is the person or persons named as the landlord on the letting agreement that is liable for tax.

Incidentally, Form 17 is a statement of fact. You can only claim your wife owns 99% of a property if she actually does.  The Inland Revenue will require proof e.g. inheritance.

chiefmissile

Thanks for your post, should i then just put my wife on the letting agreement is that what you are saying?

Plumpud_3

yes, if she is the landlord, she is will be the one assessable.

MarkyMarkD

It doesn't matter who owns the property, it is the person or persons named as the landlord on the letting agreement that is liable for tax.

Incidentally, Form 17 is a statement of fact. You can only claim your wife owns 99% of a property if she actually does.  The Inland Revenue will require proof e.g. inheritance.

Plumpud

Your posts on property and taxation appear very wise, but unless I am sorely mistaken this aspect of your advice is incorrect.

IR150 states very clearly that, if you own a property jointly with your wife/husband, the rental income is treated as 50:50 unless the property is actually owned in different proportions and the tax offices of both parties are notified that this is the case.

There is no mention in IR150 of the name on the tenancy agreement having anything to do with it.

Paragraph 24 in IR150 refers.

To be fair, wouldn't it be a blatant means of tax-avoidance if people could randomly opt to have the landlord shown on the tenancy agreement as some non-taxpaying person - e.g. their infant child - whilst retaining ownership?

Plumpud_3

Whilst IR150 covers almost every aspect of rental income, it is not the actual legislation and as such, is not the final word on the matter.

I worked for the Inland Revenue for over 13 years, specialising in rental income.

It is quite common for the landlord to be the lower income partner. Something that the better accountants advise their clients. Much the same as putting investment income into the name of the lower income partner and viewed the same by the Revenue.

The only thing to take into account is that it is not done in a fraudulent manner. That is, two or more allowable actions result in tax avoidance - soon to be put into specific anti-avoidance tax legislation, but already the case as proved by previous tax cases (I don't have any specific cases to hand, but there are a number).

A simple example can illustrate the point. If you rent a property, then sub-let a room, who is responsible for declaring the income from the sub-let? You are as the landlord, not the owner.