Transfer of rental income to spouse who is lower rate tax payer?

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    Transfer of rental income to spouse who is lower rate tax payer?

    Hi, help please. There is so much conflicting information around. In summary, I have a reasonable size rental portfolio and wish to transfer some rental income to my wife who is in the lower tax band. I own the properties in my sole name. There are various articles on the internet that suggest I can transfer just 1% share to my wife as a tenant in common but as we are married the tax rules state that we will be taxed at 50% each which I am happy with. I am aware of the need to file a form 17 if we wished to be taxed other than 50/50 but this seems to apply only where the couple wants to be taxed at a different rate i.e. 75%/25% but when making the Form 17 election the rental income split has to be the same as the property ownership split. There are a lot of internet articles promoting the idea of transfer just 1% to spouse and take advantage of the tax rules that state that the income will be taxed 50/50 irrespective of the ownership share. So far so good that sounds great. However my own accountant and solicitor do not agree and say if HMRC look into it I could owe back taxes and fines. The big issue for me is the inherent Capital Gains that exist. I am a bit older than my wife and likely to die first. If i have gifted a 50% share of the property (and not 1%) then my wife who is the sole beneficiary of my Will is likely to end up with a bigger tax bill than the money we have saved along the way if she liquidates any assets after my death. CGT is not payable on death hence it does not make sense to transfer a 50% share to my wife. So in summary, is there anyone out there who has definitive advice or experience in this matter? In simple terms can I safely transfer 1% of property ownership ( either transfer or deed of trust) to my wife who will pay tax on 50% of the income at 20% instead of my 40%. For me to retain 99% interest in the property and especially keep the capital gain liability i.e. under no circumstances do I want to risk my wife taking on a CGT liability that she will not have if she inherits the remaining 99% under the terms of my Will. I will be very appreciative of hearing from anyone who has 'first hand' experience. I have spent 3 days poring over internet articles. Any input will be gratefully received. Thanks Nigel from Devon

    #2
    This is something you need to discuss with an accountant or a family solicitor - the options are very specific to each individual circumstance.

    There might be additional issues if the properties are mortgaged, because a) the lender might object and b) the "gift" may require your wife to take on the mortgage, and then the gift becomes a financial transaction with other tax implications.

    I don't think you are correct about the notion of transferring 1% of a property to your wife and using a deed of trust to change the ownership split. Conventionally, the deed of trust route is appropriate where the property is owned as joint tenants and the deed is used to overcome the presumed 50:50 split in beneficial ownership.

    With joint ownership, there's no IHT or CGT issue if you die, the joint ownership means the property becomes your wifes automatically. The deed of trust simply ceases to be relevant and all is well. There's no inheritance issue as she already owns the property.

    Transferring 1% to your wife doesn't seem to achieve what you are trying to do.

    But you need professional advice (which you seem to want to ignore in this case) - it might be more successful to lay out your circumstances and ask the experts to propose a solution that minimises tax over a specific period.
    Their advice will have to be based on current rules, which might change.

    Because it's impossible to know your very personal situation online, this kind of advice has to be specific and personal.
    And you need to be prepared to do unpleasant things like estimate when you are likely to die.

    One point, Solicitors and Accountants do have a tendency to treat all money as equally valuable.
    They will often point out that solution x is better than solution y because under x less tax is payable overall.
    But often, solution y gives more money to spend now, which might be actually more use to you, and you don't pay IHT, your estate does, and, when it's paid you're dead, which makes it much less painful to pay.
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

    Comment


      #3
      Dear jpkeates, thank you sincerely for the time taken to reply. I seemed to have missed the crucial point I was trying to make. As I understand it, and various articles seem to agree, ( but my accountant seems reluctant hence this posting) if I transfer 1% to my wife she becomes a part owner as tenant in common. But the tax rules state that where a married couple own a property together they will be taxed 50/50 irrespective of the capital share. ( Unless a Form 17 is supplied to change the taxation split but I do not wish to do this, just accept the 50/50 taxation split) These are HMRC 'special rules' that only apply to married couples. I will arrange the 1% transfer by a formal deed or simple DOT whichever is the most effective. My understanding of a 'joint owner' is that each owner must be entitled to equal shares so a 1% transfer to my wife means we are tenants in common and the property does not pass to my wife by survivorship on my death and so it is up to me to leave the assets to my wife in my Will. I am aware that gifts to spouse on death are exempt from IHT. My reference to CGT was based on my concerns that my wife could be liable for CGT at later date. By example, if I die tomorrow, my wife receives my estate free of CGT and IHT. However, if I gift my wife 50% now, then she will be liable for any CGT if selling her 50% share at any later date. Our respective tax bills could reduce by a few thousand over a few years but my wife would have to pay substantial CGT if she liquidated some assets after I die. She would have inherited half but would pay tax on the gain on the other half if I gifted 50% while alive. So I have referred to the 'special rules' that apply to married couples. I am more than happy to take legal advice, and pay for it, but I was hoping to get some clarity from readers who have first hand experience. This is copied from the HMRC manual. Once again, I would appreciate any input from readers who have any experience in this subject. In summary my objective is simply to be taxed 50/50 with my wife on property income during my lifetime but keep 99% of the ownership of the property so that I can leave my assets to my wife without fear of any CGT issues at later date.

      The following is the wording from the HMRC manual reference TSEM9846. It does not seem ambiguous in any way.

      Property held jointly by married couples or civil partners: Form 17 rule: declaration is optional
      A couple do not have to opt for a different split. A couple could accept the standard 50/50 split for jointly held property, even if one spouse or civil partner holds 90% of the capital and income and the other spouse or civil partner holds 10%.
      A couple can make a different choice for each asset. In some cases they can choose to be taxed on their actual entitlement; in others they can accept the standard 50/50 basis.
      The couple do not have to make a declaration as soon as they get a new asset.

      Thanks for reading
      Nigel in Sidmouth

      Comment


        #4
        This isn't something I would claim to be an expert on.
        I have had a number of discussions with accountants about splitting property income when I was a higher rate tax payer and my wife wasn't - but I didn't actually make any changes as a result of the discussions.

        I think you are basically wrong about the idea of transferring 1% of the title and splitting the income 50:50. The 50:50 default is for applied when there is no other split based on the facts. For example, if your wife had actually paid for the property in full, she would be the 100% beneficial owner, regardless of how the land is registered.
        If you have created a 1:99 ownership, the tax will follow that split unless you make a formal declaration otherwise.

        Regardless of that (given that I am not 100% confident I'm right), you can't treat income one way and ownership for disposal differently for tax.
        If you've been telling HMRC the ownership is 50:50 for tax purposes, they will continue in that treatment should one of you die. Which means your concerns about CGT exist using either route.

        The only way I am aware of doing that is to use a deed to split the ownership one way and then, at some point acceptable to the revenue, change the split to how you want the "post your death" situation to be by another deed (or by reverting to the actual split).

        So you own the property 50:50 and use a deed to vary the income split to 1:99, then, at some future point (that isn't on your death bed or at the point of sale), end the deed, notify the revenue again and restore the "actual" split. Or the split is 1:99, you vary it to 50:50 and then revert to 1:99.

        The risk (as ever) is dying outside of the planned route.

        Alternatively, you can put the property in trust and keep the beneficial ownership outside both of your estates altogether. The trust has to complete it's own tax return and the CGT rules for trustees are different, so, again, this route may not be appropriate.
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          Depending on whether you have mortgages or not it may be simpler to just gift her a whole property or 2.

          Comment


            #6
            Dear Gents thanks for replies. As jpkeates alluded to, if I knew when I was going to die, decisions would be easier. Kape65, thank you for your comment, yes that achieves a result, but the inherent CGT could become a problem at later date. So the conflicting advice goes on. There seems nothing ambiguous about the TSEM9846 rule mentioned above. It is a 'special' rule for married partners, and clearly says married couples are taxed 50/50 irrespective of ownership share e.g. 1%/99% UNLESS a Form 17 has been submitted. I do hope there is someone out there who can add further light. Note to jpkeates, thanks for all your comments. You did however state "If you've been telling HMRC the ownership is 50:50 for tax purposes" That is not strictly correct. All I hope to do is become a tenant in common owner with my wife in 1%/99% shares and if the taxman elects to tax us 50/50 because of the special rules, that should not effect the capital. I just need to be sure if I can!.

            Comment


              #7
              I have a client who recently married , has a significant portfolio all bar one is mortgaged and is a higher tax payer.
              Following several meetings including research by myself of the attitudes of all lenders the following recommendations have been made to the client:- A significant amount of rental income will be transferred to his wife to take full advantage of her present tax position. A Deed of Consent will be entered into with HMRC consent, The accountant doesn’t feel that consent from the various lenders needs to be obtained notwithstanding the responses I received!!

              The one aspect which the client is concerned about is that after the tax year 2016/17 the level of rent he will be declaring will be substantially lower and the PRA rental stress calculations wouldn’t get even close to 125% @ 5%: Fine if he has no intentions of making further acquisitions or refinancing current properties.

              Even Accountants seem to have different approaches to what clearly is a common problem facing portfolio landlords so what hope is there for the client in staying on the straight and narrow in keeping lenders happy , HMRC for the tax and importantly the lady of the house having an increase in her spending money!!

              Comment


                #8
                Is it really as simple as that to transfer the income when she isn't listed on the mortgage or the deeds? I don't believe it! (That doesn't mean I don't believe you)

                Comment


                  #9
                  Your first post indicates you may have some misunderstanding of the tax situation :

                  You said "CGT is not payable on death hence it does not make sense to transfer a 50% share to my wife"

                  Whilst you are living , the capital gain from sale of property by you is subject to capital gains tax at 28% but after death , your estate is charged IHT at 40% ( for any amounts left in your estate above the £325K allowance )

                  If you have a reasonable sized portfolio , you can afford to add your wife's name to ONE property and register as "joint tenants" which means you and wife together own the entire property . You can use a trust Deed and Form 17 to change the distribution of income to 1/99 % in favour of wife and enjoy the tax benefit whilst you are living. .






                  Comment


                    #10
                    Kale 65 , You are quite correct in your assumption that it isn’t as straight forward , I have previously posted on this topic last month. I spoke with all of the lenders my client has borrowings with and they each stated that Consent would have to be applied for and unless there was something out of the ordinary about the individual submission the approval would not be given. Clearly higher opinions suggest that this could be proceeded with and without seeking the consent of lenders given that the loans remain in the sole name of the client and Land Registry do not need to be notified on what is considered to be a completely external matter between husband/wife and HMRC.
                    My files have been duly noted of the communications with client, lenders and the accountant just in case there is any possible comeback!!!

                    Comment


                      #11
                      The issue is likely to be that the legal advice is based on the "law" and the solicitors are not considering the lender's terms and conditions, of which they are not aware.

                      There is no legislative reason to notify anyone of a change of beneficial ownership (which can happen informally - for example, if a property owner is helped in paying a mortgage by a partner). But the requirement is in the lender's contract with the loanee, which is a specific agreement the advisors are ignoring.

                      Now, it's possible the solicitors know something I don't, but I suspect the advice is wrong, but unlikely to have a real world effect. Mortgages are paid and repaid and the issue with the change in beneficial ownership doesn't arise.

                      And because a change in beneficial ownership can arise from a change in behaviour, it's hard to see how any clause that restricts it can be 100% enforced.
                      When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                      Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                      Comment


                        #12
                        Dear ladies and gents thank you for all your comments but it seems some writers have gone off on a tangent and discussing the issues of properties that are mortgaged. I am fortunate, I do not have any loans on the properties in question. Trying to phrase it concisely, I have a portfolio of property no mortgages and am a 40% tax payer. My wife has not utilised her full 20% band. I wish to transfer her 1% of the property and under the special rules ( please google TSEM9846) we should be taxed 50/50 on the rental income UNLESS we submit a Form 17 that is OPTIONAL. To be clear about CGT - if i transfer a 50% share now to my wife while i am alive, she will take on the inherent CGT liability on that 50% at sometime in future even after I die. If I only give her 1% ( and retain 99% ownership) then if I die she will inherit the 99% free of IHT and potential for CGT. So it makes no sense to transfer 50% while I am alive. I am 67 and 15.5 years older than my wife. I was hoping someone would have first-hand experience of being taxed 50/50 on rental income on the TSEM9846 rule when holding property jointly but in unequal shares.

                        Comment


                          #13
                          To Gordon 999 you wrote:

                          Your first post indicates you may have some misunderstanding of the tax situation : You said "CGT is not payable on death hence it does not make sense to transfer a 50% share to my wife" Whilst you are living , the capital gain from sale of property by you is subject to capital gains tax at 28% but after death , your estate is charged IHT at 40% ( for any amounts left in your estate above the £325K allowance ) If you have a reasonable sized portfolio , you can afford to add your wife's name to ONE property and register as "joint tenants" which means you and wife together own the entire property . You can use a trust Deed and Form 17 to change the distribution of income to 1/99 % in favour of wife and enjoy the tax benefit whilst you are living. .

                          Dear Gordon 999 thank you for your input - but please consider the scenario further. Let's say i bought house for £100.000 20 years ago and worth £300,000 now. The gain is £200,000 and CGT at 28% £56,000. If I follow your suggestion above, my wife and my joint tax could fall by £2,400 a year ( say £12,000 income now taxed at 20% = £2,400 not my 40% £4,800). BUT in the event of my death and my wife selling the house, on today's values she would pay £56,000 CGT. However, if I carry on, do nothing and pay the extra tax every year and die, she will acquire the property free of IHT and CGT. If she subsequently sold the property she would not have to pay £56,000 in CGT. At a tax saving of £2,400 a year to give my wife 995 of the property I won't live long enough to see a benefit. My estate will be better off if i simply pay the tax. So the idea is to share the income while i am alive under the TSEM9846 rule but retain 99% of the beneficial ownership and avoid the CGT my wife will have to pay at some future date.

                          Comment


                            #14
                            I found this discussion of sale of inherited property by surviving spouse on another website- taxationweb :

                            https://www.taxationweb.co.uk/forum/...st-t50672.html

                            It seems any property passing to surviving spouse ( wife ) by executor is deemed to be transferred at market value at death of first spouse . So taking your example paying £ 2400 in income tax for another 12 years may reduce future CGT because wife's acquisition cost is taken as £300,000 instead of your original purchase of £100K.

                            As for sharing income 50: 50 by just gifting 1% interest of the property to spouse ??? I think you need to write to hmrc to ask if they will agree to your proposal.

                            Comment


                              #15
                              The wording of the income tax act reads as though this will work, but I think that's a misreading.

                              I think the flaw is that tax follows beneficial ownership, not title and the 99% owner is overwhelmingly likely to be the beneficial owner of 99% of the property.
                              The 50:50 "presumption" doesn't (I am increasingly confident) apply where there is a real and obvious split in beneficial ownership.

                              s837 of the Income Tax Act 2007 (which is the section about changing the proportions by declaration) seems to support this:
                              (1)The individuals may make a joint declaration under this section if—
                              (a)one of them is beneficially entitled to the income to the exclusion of the other, or
                              (b)they are beneficially entitled to the income in unequal shares.

                              I think that (b) applies here.
                              If the beneficial split doesn't overcome the 50:50 presumption, neither (a) or (b) make much sense.

                              I suspect that this can probably be overcome by making a trust and form 17 declaration to split the income 49:51 (or even 50:50, but that just seems odd).
                              When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                              Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                              Comment

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