Second home tax - should I divorce and re-marry?

[ReluctantLL2022]

Hi,
Around 10 years ago, I bought my first property to live in. My dad helped me out and paid a 50% deposit to get me on the ladder. I'm listed as the owner on the summary of title land registry documents under the leaseholder/freeholder section.

After living in the property for several years, I moved away after meeting my (now) wife and I left the property to my dad. He rented it out. I never collected any rental income from the property - I figured it's the least I could as I didn't pay him any rent whilst I lived in it for several years.

The issue now is that I want to buy a family home with my wife, so I want to sell the property, but my dad doesn't (he's a stubborn old man) - I'm not going to court as I really don't want a bad relationship with my father. Whilst it would be nice to have some money from selling the property (which is worth around £250K now), that's not my main concern - the issue is that my wife and I get hit with a second home owner stamp duty charge and we're looking at buying a house around the £500K mark, so a lot of tax on top of a hefty price.

There's a small mortgage on the property of around £20K, which I can pay off if needed.

Ideally, I'd like to hand my share of the property away and somehow legally protect my interest so that if it sold in 10 or 20 years I'm entitled to something. Is this possible? Failing that, is there a way to change legal ownership without actually making a sale involving money being exchanged, even if it means me giving up any future claim?

Lastly, I'm considering whether divorcing my wife, giving her my life savings and then her buying the property exclusively in her name would cut it?**

Please advise.

Thanks

** Ps - before any mentions can I trust my wife, absolutely 100%!!

[Neelix]

Well, the 2nd home stamp duty is only £30k , and if it was your first home it would be £10k

so you are looking to save £20 k

Best you sell your first home ?

[JK0]

These all sound like mad schemes. I can't see how Dad can stop you evicting tenant and selling house.

[DoricPixie]

SDLT is based on beneficial ownership not legal ownership so even if you dispose of your legal ownership it sounds like you still want to remain a beneficial owner to get some money if/when the property is eventually sold meaning the higher rate of SDLT will still apply on the purchase of your family home.

If you decide to dispose of both your legal and beneficial ownership of the rental property then there will be a CGT liability.

Is there a declaration of trust in place that allows your father to receive all the rent for property of which you appear to be the sole owner? If not then I think you should have been declaring and paying income tax on the rental income the whole time. A declaration of trust giving your father some/all beneficial ownership of the property is the only way he'd actually be able to stop you from selling the property.

Do you have £500,000 in savings or would your ex-wife require a mortgage to purchase the new home? If a mortgage is required would the ex-wife pass affordability on her own assuming she can find a lender willing to accept a gifted deposit from an ex-spouse who will also reside in the property? Do you expect to have a beneficial ownership in the new property? If so then the higher rate of SDLT will still apply.

[jpkeates]

SDLT is based on beneficial ownership not legal ownership

That doesn’t sound right.

If the OP is listed as the property owner whats stopping them from selling the property, other than their father not wanting them to, and what can possibly change that in future?

[ReluctantLL2022]

Doric,
My wife with her savings would be able to pass affordability on her own for a mortgage. In terms of deposit, how would the lender know that I gifted her money? How will the mortgage company know that I'll be living in the property and why would they care if the mortgage is being on time every month.

I don't think there is a declaration of trust - I've never seen or signed one. Really on the income? I need to declare and pay income tax on rent I've never received (rent that has been declared and paid tax on already).

"If you decide to dispose of both your legal and beneficial ownership of the rental property then there will be a CGT liability." - if I dispose of my share and receive no income from it, what I am paying CGT on?

[jpkeates]

How will the mortgage company know that I'll be living in the property and why would they care if the mortgage is being on time every month.

I don't understand why that's an issue.

I don't think there is a declaration of trust - I've never seen or signed one. Really on the income? I need to declare and pay income tax on rent I've never received (rent that has been declared and paid tax on already).

As long as the tax paid is the same as it would have been if you'd received the income, the issue is only technical.
If the result is that less tax has been paid, it's possibly fraud.

"If you decide to dispose of both your legal and beneficial ownership of the rental property then there will be a CGT liability." - if I dispose of my share and receive no income from it, what I am paying CGT on?

The CGT is based on the market value of the property, not the money actually paid over.

[DoricPixie]

That doesn’t sound right.

It's why those couples who try to circumvent the higher rate of SDLT rules by having a joint borrower sole legal owner mortgages fail, because both joint borrowers have a beneficial interest as both of them took out the mortgage so they can both buy a property to live in regardless of how many people are named as legal owners on the deeds.

This is a SDLT case study not a million miles away from ReluctantLL2022's situation although I suspect ReluctantLL2022's is both the sole beneficial and sole legal owner in their case.

https://www.moore.co.uk/msuk/norther...t-case-study-1

If the OP is listed as the property owner whats stopping them from selling the property, other than their father not wanting them to, and what can possibly change that in future?

As it seems like ReluctantLL2022 is both legal and beneficial owner there is nothing stopping them from selling the property.

[DoricPixie]

Doric,
My wife with her savings would be able to pass affordability on her own for a mortgage. In terms of deposit, how would the lender know that I gifted her money? How will the mortgage company know that I'll be living in the property and why would they care if the mortgage is being on time every month.

Her solicitor, who will most likely also be acting for the mortgage lender, will want to know the source of the funds for the deposit. Not all lenders will accept a gifted deposit coming from someone who will live in the property but not named on the mortgage.

I don't think there is a declaration of trust - I've never seen or signed one. Really on the income? I need to declare and pay income tax on rent I've never received (rent that has been declared and paid tax on already).

Yes because you appear to be the sole legal and beneficial owner of the property. You have underpaid tax and your father has overpaid tax. Rental income is similar to income in the form of a salary. If I want to give my dad money that I have earned I still have to get taxed on it before I hand it over to my dad. I can't take my salary gross and leave it to those being gifted the money to pay the tax on it.

"If you decide to dispose of both your legal and beneficial ownership of the rental property then there will be a CGT liability." - if I dispose of my share and receive no income from it, what I am paying CGT on?

Your gain will be based on the market value at the time you disposed on the property.

[Gordon999]

R-2022

1. Have you calculated how much capital gains tax is payable after sale of the "first property" ? Since you lived at the property for a few years , the capital gain during " period of own residence" is not taxed.

So you pay tax on " the capital gains during the letting period". Would the capital gains tax be more that £20K ?

2. Suppose you consider using a company which is set up and owned by you ( 90%) and father ( 10%) to buy the first property from you at say £240K price ? The Company's funds to purchase could be financed by 50% loan from a mortgage bank plus 50% private loan from directors ( you and dad ).

[ReluctantLL2022]

Gordon999,
Good point on #1, I haven't calculated the capital gain, but I suspect it'll be more than £20K.

#2 sounds complicated - is this relatively straightforward to do with most lawyers?

"It's why those couples who try to circumvent the higher rate of SDLT rules by having a joint borrower sole legal owner mortgages fail" - do you have any evidence that they all fail? I suspect many succeed without any issues.

[jpkeates]

It's very unusual for a lender to be prepared to lend on a joint basis against a property owned by only one of joint borrowers.
And the additional SDLT would be payable if the two people were married anyway.

I can't imagine there are many instances of this ever happening.

[DoricPixie]

- do you have any evidence that they all fail? I suspect many succeed without any issues.

https://www.samconveyancing.co.uk/ne...lications-6085

[DoricPixie]

It's very unusual for a lender to be prepared to lend on a joint basis against a property owned by only one of joint borrowers.
And the additional SDLT would be payable if the two people were married anyway.

I can't imagine there are many instances of this ever happening.

There’d be no point in attempting it as a married couple but unmarried couples would also be in for a nasty surprise since HMRC consider getting to occupy the property in such circumstances as a benefit.

[Gordon999]

R-2022,

In #2 , I proposed the "company" buys the property from you and the company becomes the owner of the property. The Company has no funds and borrows the £240K ; 50% mortgage loan from Bank and 50% loan from you ( director's personal loan ). The bank loan is taken up by the company . There are no joint borrowers.

This sale to your company removes your name from the property so that you + wife can buy an new home without having to pay the 3% extra sdlt.

The company will pay sdlt on the £240K purchase = 2% x ( £240K-£125K ) + 3% on £240K = £2300 + £7200= £9500.

The company owns the property and receives the rental profit ( rents minus maintenance expenses minus mortgage interest).