Local accountants and tax advisers, Trueman Brown, advise married couples on the purchase of buy-to-let properties.
Recently, we received a telephone call from a couple who required advice on their buy-to-let holdings.
Upon reviewing the couple’s last few tax returns we noticed a change in the way in the manner in which the income arising from the property portfolio was included on their self-assessment tax returns.
For the fiscal year 2014/15, the 99% of the property income had been allocated to the wife who is a basic rate taxpayer, with 1% allocated to higher rate taxpayer husband.
Upon further questioning, we quickly established that the couple still beneficially held the properties in an equal 50:50 share.
When we asked why they had included all of the property income in the wife’s tax return we received the reply:
“…The Man in the Pub told us that if one spouse was a higher rate taxpayer and the other a basic rate taxpayer, then the whole rental income should be allocated to the spouse who pays tax at the basic rate”.
If only things were that simple!
If a married couple want to obtain the most advantageous tax advantage, then the couple must arrange the question of the property OWNERSHIP correctly.
Types Of Property Ownership
A married couple (or civil partnership) can own a property in England & Wales in ways:-
- As ‘joint tenants’ whereby each partner holds an equal interest in the property.
- As ‘tenants in common’ whereby each partner holds a separate and identifiable share in the property.
If the married couple (or civil partnership) own property(ies) as ‘joint tenants’, then automatically any income arising from these property(ies) should normally be split equally for income tax purposes.
If the married couple (or civil partnership) own property(ies) as ‘tenants in common’ then, again, automatically any income arising from these property(ies) should normally be split equally for income tax purposes.
The difference is that the couple can make a declaration using the Form 17 to have the rental income split, for income tax purposes, in the proportion that they hold the beneficial interest in the property.
The couple have 60 days from the day the declaration being made to file the Form 17. This declaration stays in effect until a change occurs in the beneficial entitlements of the income or the property itself.
CAN YOU CHANGE STATUS?
The next question is – can a couple who own property(ies) as ‘joint tenants’ change their status to ‘tenants in common’? The answer is a resounding yes!
So, using the example of our married couple, the higher rate taxpayer husband could gift a 49% share in the property(ies) to his wife.
It is vital, though, that the legal formalities are properly complied with and that evidence of the gift taking place is maintained. We would also recommend that the transferor making the gift writes a letter to accompany the gift.
The couple could make the change with Land Registry Office themselves or use the services of a good solicitor who will charge around £400-£500.
There are tax consequences for making the gift which the couple should be aware of:-
Capital Gains Tax (CGT)
Any transfers between spouses take place at a ‘no gain/no loss’ where the transferee acquires the interest in the property at the original cost to the transferor. No CGT would be payable even though a disposal has taken place.
Stamp Duty Land Tax (SDLT)
There would be no SDLT payable unless there is an outstanding mortgage on the property.
Example:
An husband and wife own a buy-to-let property as ‘joint tenants.
The husband, a higher rate taxpayer, decides to gift a 49% beneficial share in the property to his wife, a basic rate taxpayer.
The value of the property is £350,000 and there is a £300,000 mortgage on the property. A 49% share of the mortgage is £147,000 which is greater than the SDLT threshold of £125,000.
So, an SDLT Return and the tax due of £440 (i.e., £125,000 x 0% plus £22,000 x 2%) should be forwarded to HMRC within 30 days of the transfer.
Local accountants and tax advisers, Trueman Brown, deliver vital services to small business. Please contact us if you require assistance.