Adding wife to the mortgage for income tax efficiency
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Pay more of your salary into your pension?0
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Whilst its a valid option unfortunately I am looking to purchase a second residential property after relocating for a new job. Will need max pay for the new mortgage.0
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Have the NW added their 1% interest loading yet?0
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Not yet, that kicks in after 6 months of CTL approval which is approx late September - early October.0
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No expert in mortgages but I gather that a residential mortgage with consent to let can be cheaper that a BTL mortgage. If you change the ownership of the property you will need a BTL mortgage, perhaps with Nationwide, perhaps with another lender but it will be a new mortgage with associated costs.
However as you have only been letting for a few months Capital Gains Tax could be a significant problem, At the present time you seem to have entitlement to Private Residence Relief in respect of the period you lived in the property but your wife cannot qualify for that. The potential effect depends on a number of factors including how long you have owned the property, how long you lived there, how long you intend to let the property, how much the property has increased in value since you bought it and how much it is likely to gain from now on. Ultimately the test is whether your savings in Income Tax will outweigh the additional Capital Gains Tax. Take a look at the help sheet on PRR for a starter.
So from what I understand, since buying the property thats currently under rent, I have lived in it for 4 years and now renting it out. For eg, if I sell the property after 6 years, Ill get the PRR for 4+1.5 years also the private lettings relief ?
I am struggling to understand how this affects my situation in relation to CGT by adding the mrs to the mortgage. For now, we are planning to move back to the property before selling it if the rules haven't changed by then.
As my wife is currently unemployed, I would pretty much get the entire rental income tax free which is why I am really hoping there's a way to get her on the mortgage.
Not sure whether calling Nationwide and explaining to them we just got married a month ago and now I want to add her to the mortgage is a good idea...:think:0 -
So from what I understand, since buying the property thats currently under rent, I have lived in it for 4 years and now renting it out. For eg, if I sell the property after 6 years, Ill get the PRR for 4+1.5 years also the private lettings relief ?
That is correct but if you gift a share of the house now you will be deemed to have sold that share to her at no gain/no loss. In other words you will be regarded as having sold to your wife for exactly what the share cost you. So, for example if the house originally cost you £100k and you gift a 90% share to your wife today she will be regarded as having bought today for £90k. As there is no gain your entitlement to PRR and lettings relief counts for nothing. If you sell the house without moving back in your remaining 10% share will still qualify for PRR and lettings relief. Her 90% share will not and she could face a pretty substantial CGT bill.
If you do move back in before selling you have to be able to demonstrate that moving back in was genuine and not just a tax saving wheeze.
A bit more light reading for you.
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg22200p
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg649500 -
Been thinking about this for the last few days. Spoke to a family friend who is an accountant and has couple of properties himself. His suggestion was to leave things as it is and jointly file a tax return which will split the income 50/50. Half it will be tax free (given my mrs is still not employed by next April) or even if she is, I could use marriage allowance to give me a little bit of a headroom to accommodate my salary increase and etc.
I am not too sure on how much id be saving if I follow through my initial plan, adding the wife on the mortgage and giving 99% to her however CGT bill for my mrs when selling the property will probably outweigh the savings ill be making right now.
Just out of curiosity, if I were allowed to add my wife to the mortgage now and give her 99% of the share, to avoid a hefty CGT when I come to sell the property, could I not amend the declaration of trust and assign 99% of the property to myself and 1% to her prior to selling the property ?0 -
as a married couple you can alter the relative shares for each of you as many times as you want toJust out of curiosity, if I were allowed to add my wife to the mortgage now and give her 99% of the share, to avoid a hefty CGT when I come to sell the property, could I not amend the declaration of trust and assign 99% of the property to myself and 1% to her prior to selling the property ?
so yes, you can always transfer some back to make you the large shareholder. However, as that is such an obvious strategy just before sale there is legislation in place which means HMRC can ignore a transfer done purely to avoid tax.
There is however a very simple solution, you never, ever, make the transfer "just" before the sale and certainly not when the property is already being marketed for sale.
You do it sufficiently far before the sale that such a link is dubious. Typically that would mean say 1 year before sale which therefore means the higher rate tax payer has to face a higher income tax bill on a higher share of the income for a period. That is a key factor which prevents HMRC saying the transfer was done purely to reduce CGT, since patently it resulted in more income tax being paid, so was not done to "avoid" tax, even if the end result is in the taxpayers favour as the total tax paid income + CGT is lower than if the shares had not been given a final change.
It is for precisely such reason that you always retain a share in the property since you preserve your PRR since that is time related, not % share related. For example, going from 99 to 1 then back to 99 is a simple case of basic maths to see if the CGT bill with "preserved" PRR is an overall "cheaper" outcome than not doing so.0 -
Out of interest what legislation are you thinking about here?0
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