Reducing adjusted net income

jungle_jeff · 15 March 2017 at 7:30AM

Having just done a rather crude calculation, I believe my adjusted net income is going to be around £48,500 for 2016/2017. Some questions:

1) If I open and pay ~ £6000 into a SIPP that I have in my cash ISA would this reduce my adjusted net income further and enough to take me under the 40% tax rate?

2) My wife and I have not applied for marriage tax allowance though she is a basic rate tax payer so I assume we aren't eligible even if I also become a basic tax payer by means of reducing my adjusted net income. If so, I'd rather keep this intact and pay higher income tax for now.

3) I/we have a BTL property. It was bought and lived in by me (then later, us) before we met and we now let it out, in my name. Can I apportion some of the income to her via a form 17 / declaration of trust this tax year EVEN IF it is held in name only? (Whether this has to be a 50/50 or I can do a 1/99 split or however).

OP re CGT question here:
http://forums.moneysavingexpert.com/showthread.php?p=72158292

Ideally I'd like to avoid CGT when I come to sell the property (which was going to be soon but now I am going to hold on to it for a another couple of years until my existing tenants leave). While I may have to pay some anyway based on the capital increase, what I'm really asking is apportioning her to the property income going to reduce my PRR/letting relief.

anselld · 15 March 2017 at 7:58AM

1). You would need to pay £5500 * 0.8 into the SIP, ie £4,400

2) No point if she does not have unused personal allowance.

3). No. She would need to be a joint owner first, Tenants in Common. And yes, transferring a share of ownership to her could affect your CGT liability.

jungle_jeff · 15 March 2017 at 9:09AM

Thank you for the reply.

Having done some research I realise I didn't explain question 3 very well. What I am looking to do is summarised in the below example taken from another site regarding BTL property:

It may be that the automatic assumption of equal split of income between spouses can in fact be used as part of tax planning. For example, the husband purchases a buy to let in his sole name. As a 40% taxpayer he is exposed to this rate of tax on the rental income. His wife has no income. The husband, however, may not wish to transfer any significant part of the real estate to his wife but would like to reduce his income tax liability on the rental income.

The husband could therefore enter into a declaration of trust under which he transfers a 1% beneficial interest in the property to his wife; he thus retains 99% beneficially of the property. No declaration is made i.e., no Form 17 is lodged with HMRC. As a consequence, under the above rule, each spouse will now be subject to income tax on 50% of the rental income. The husband will have effectively reduced his income tax liability on the rental income (as 50% is allocated to his wife) whilst he still retains the bulk (99%) of the property.

While this would potentially affect CGT when time came to sell, it goes on to suggest:
Beneficial ownership for capital gains tax purposes will accordingly be 1:99 (even though in the absence of a completed Form 17 (see above) any income arising from the property will be split 50:50) and any gain arising on a disposal of the property (e.g., gift or sale) will be apportioned correspondingly (i.e., 99:1).

So while it could affect my CGT it would presumably be by a considerably smaller amount. And this way my wife and I could split the income helping me to have a lower adjusted net income (maybe not this tax year now if too late to complete a declaration of trust but next year).

anselld · 15 March 2017 at 12:23PM

Yes, that is all correct, however AFAIK you cannot transfer any percentage of beneficial ownership to her until she is a joint legal owner on the deeds.

jungle_jeff · 15 March 2017 at 11:53PM

Thanks for the reply. I'm assuming this should be fairly straight forward (subject to mortgage company allowing it). So I would:
1) Add her to deeds.
2) complete a declaration of trust as tenants in common, apportioning a % for legal ownership (most likely 1/99 to minimise a reduction in my PRR for CGT purposes on disposal).
3) split income 50/50 when completing our tax self assessments.

anselld · 16 March 2017 at 7:37AM

jungle_jeff wrote: »

Thanks for the reply. I'm assuming this should be fairly straight forward (subject to mortgage company allowing it). So I would:
1) Add her to deeds.
2) complete a declaration of trust as tenants in common, apportioning a % for legal ownership (most likely 1/99 to minimise a reduction in my PRR for CGT purposes on disposal).
3) split income 50/50 when completing our tax self assessments.

Yes, although you can only split income after this process is complete so it is not going to have any effect on 2016/17 tax year.

jungle_jeff · 17 March 2017 at 12:09AM

Advice elsewhere suggests that she wouldn't need to be on the deeds? Either way, I'll look in to it. Thanks you for your help.

polymaff · 17 March 2017 at 6:24PM

jungle_jeff wrote: »

2) My wife and I have not applied for marriage tax allowance though she is a basic rate tax payer so I assume we aren't eligible ....

anselld wrote: »

2) No point if she does not have unused personal allowance.

a) @jj a basic rate tax payer can make a MAT election.

b) @anselld. Not so. If the elector's income that would become liable to income tax was dividend income, then it would make sense to elect.

Reducing adjusted net income

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