Another Form 17 Question. Avoiding 60% TAX

[RobR]

Hi Forum, Please be gentle on a new member and first time poster.

Hopefully, someone will be able to assist me in an area I realise has been covered numerous times. Currently, I have trawled the internet, spoke with my Accountant and Solicitor, to say I have received conflicting information would be an understatement.

Obviously I am trying to plan my Tax liabilities in the most efficient manner.

I will try and keep my query concise and provide as much information as possible. So here goes:

I am married and have 4 rental properties. The properties are owned 50/50 with my wife and were purchased as ' Joint Tenants'. There are no mortgages on any of the properties and they are owned outright by ourselves.
I undertake all of the lettings and together we are classed as the Landlord on the Tenancy Agreements.

I am a 40% taxpayer (full time job). My wife is 20% (full time job)

Here is the dilemma....
This year, 2018/19, my earnings have taken me way past the 60% tax bracket. (100k-123K). Therefore to mitigate this, I have paid a large amount into my pension to bring my 'adjusted earnings' back under £100K. The contribution into my pension is in excess of £55K (I have 3 years carry forward to enable me to still be under the 40K limit).

My wife earns £40K, so this year she will have £10K before she becomes a 40% tax payer. For the coming year, I do not want to have to pay a similar amount into MY pension. Rental income is £25K, so this will push my wife into 40% for the coming year. (40K + 12,500) with her current pension contributions this will bring her back down to 20% tax.

What I would like to do, is alter the proportion of rental income we receive to make my wife receive the majority. (probably 95/5 ish...) That way, if she receives £24K we can make additional pension contributions in her name to benefit from the 40% relief from HMRC.

I am always going to be in 40% tax (I accept that tax is due). What I need to do is avoid the £100K - £123K bracket. Therefore I am happy to make Pension contributions. However, I will be unable to sustain the £55K contributions, as all of my carry forward allowance will be used up. I need to transfer some earnings over to the wife to use up her £40K allowance.

My thoughts are:
1. Change ownership from 'Joint Tenants' to 'Tenants in Common'
2. Submit Form 17 to change the beneficial interest of the properties. (by way of gifting to my wife)
3. Submit SA as normal but Wife will receive more rental income.
4. Wife to make Pension AVC's to bring her tax bracket back down to 20%

Then, before we sell. Submit another Form 17 to put the beneficial interest back to 50/50 to enable us to both benefit from our Capital Gains allowance. Would there be a minimum time to do this?

I don't think there would be any Stamp Duty liability?


Thoughts???

My accountant is reluctant to undertake this and is steering me away. However, doing some research it seems to be a 'legitimate' way to get your Tax affairs in order.

thanks in advance.

[jpkeates]

Why not use a deed of trust to change the beneficial ownership for tax purposes?
It's simpler than changing the title and is much more flexible if you want to change the percentage ownership in future - for example, if you want to sell and take advantage of two lots of capital gains tax personal allowance.

What you're suggesting looks like it would work, but it looks like a more complicated way of achieving a fairly common outcome.

[JK0]

Won't your wife's tax relief be only the 20% for most of her contribution, in view of her income only just being above the threshold?

[RobR]

jpkeates,

Hi,
sorry, yes Deed of Trust would be done in step 2. When I gift to the wife. I don't think you can do a DOT if you are Joint Tennants??

Therefore I need to change to tenants in common? I am more than happy to take any guidance on the simplest way to achieve the end result.

[RobR]

JK0,

Hi,mtgsnks for response.
Hopefully, she should have 10k at 20% then 15k would be at 40%. So if she makes £15k pension payments this will have full 40% relief.

It also means I don't have to make the £15k contributions to my pension. I don't really want to be at my 40k pension limit and still have adjusted earnings over £100k as HMRC really clobber you then.

There just seems to be conflicting info if HMRC accept without question that my wife is now beneficial owner of 99% of the income?

even my accountant says it's a grey area, yet it appears the norm in most instances.

[Kape65]

What you are proposing to do is spot on in my eyes and is as you say the norm. The only grey area I can see is that beneficial ownership has to truly reflect your wife's share of the property but most people seem to ignore the implications in this.

[RobR]

Kape65,

Thanks for that,
the grey area is very GREY, hence lots of conflicting info.

If if I am gifting my share by way of DOT then the beneficial ownership is a true reflection, regardless of who's money actually paid for them???? I think ? 😳

Or do HMRC look at it and say this whole situation is created to pay less tax?

Capital Gains is not applicable but not sure on Stamp Duty? My thoughts are not as we are not changing ownership only moving to tenants in common?

[JK0]

The problem with 'grey areas' is that HMRC have form for finding against taxpayers, and then going back several years for compensation. (Ask David Beckham about his film scheme.)

[RobR]

Yes I fully agree....
However, I don't think gifting beneficial interest can be seen the same as Tax avoidance in a (ahem) 'film'?

If you can gift between spouses to legitimately arrange your tax affairs to reduce your tax liabilities, then, if it complies with HMRC rules, they will have no more cause to chase you for tax than if you put your cash in an ISA.

The clarification needs to be, does HMRC view the beneficial gifts of rental income as 'avoidance' or as a legitimate way to arrange your tax affairs. This is were the conflicting info is so grey.

It seems that gifts between H and W is a 'normal' tax arrangement. ??? has anyone been challenged to the contrary?

So many LL seem to accept it and have used it. Even other websites promoting the service. Yet, my accountant is reluctant to pursue this route. Is it because he is not familiar with this property set up? or do HMRC not allow it?

confused??

[jpkeates]

Sorry, I read the part about owning the property 50:50 and missed that you were actually joint tenants (which means technically you both own all of the property, there is no split).
So yes, you would need to be tenants in common as an initial step.

My point was not to vary the ownership percentages in the title.
Keep that at 50:50 and use a deed of trust to make the adjustment for tax efficiency.
If circumstances change or you want to sell the property and need a different split for CGT efficiency, it's much easier to rip the trust up and tell HMRC than change the title again (and possibly pay SDLT for the privilege).

[RobR]

Many thanks,

That seems to be the way I was thinking... although I will take on board your point at keeping it 50:50 on the title.

it seems that you support this as a legitimate way forward?

[Kape65]

There shouldn't be any SDLT to pay as their is no consideration i.e you are not being paid by your wife for the share she is being given.

[Kape65]

My point was not to vary the ownership percentages in the title.

Can somebody please explain to me how you change percentage ownership of title. My solicitor keeps telling me it's not possible.

[jpkeates]

Can somebody please explain to me how you change percentage ownership of title. My solicitor keeps telling me it's not possible.

Change your solicitor, or ask the question again.

There are two ways to vary the percentage ownership.
One is to formally change the title deeds. You gift your spouse (or they gift you) a share in the property. You do this by being tenants in common and explicitly recording who owns what share. If the deeds don't explicitly define a share, it's presumed to be 50:50 (absent any other evidence to the contrary).

Or you create evidence to the contrary in the form of a deed of trust, which shows that you intend the property's beneficial ownership to be different to that in the title deeds. So, as a married couple, you wish to arrange your financial affairs in a way that suits both of you.

If you're not married, you don't have to be so formal, so being married makes things a little more complicated.

If you own the title as joint tenants, you can't change the percentage of ownership, because both of you own the entire title (jointly), so there's no percentage to vary.

[Kape65]

Maybe you can point me in the direction of a form or document that allows you to choose a percentage of ownership other than an equal share when registering title. I know a previous poster has said it's possible but I'm yet to see the proof, even Google doesn't have the answer. I would love this to be possible as it could save me a lot of money!