Question about rental income and tax due

[ryanb741]

A question for just a top-line answer please.

I work full time and am a 45% taxpayer.My wife is a stay at home mum/carer as we have an autistic son and has no income as a result. We live in a mortgaged apartment in West London and I am thinking of moving outside of London. If we decided to rent out the property (which is in my name) and rent a place elsewhere would I need to pay tax at 45% on the rental income even though it is the only property (in the UK anyway, my wife has a property and land in Thailand but these are left un-rented). If so there is no point doing this as I'd be losing 45% on the rental income which makes moving super-expensive. But as my wife essentially has £12.5k unused personal allowance could we not transfer the rental income to her?

I would envisage rental income to be around £2k a month (on a 2 bed flat). Assume 10% paid to the letting agency, £500 a month mortgage interest (although I believe tax relief on this is being phased out) and permanent service charges of around £300 a month (there are a further £350 a month on top that are optional and are related to car parking and so on which the tenant can choose to avail of or otherwise). So these added up net the realisable rental income to around the £12.5k personal allowance of my wife - just need to find a way to legally and correctly assign the income to her (as a family we don'g benefit from her unused personal allowance even though in many EU countries tax is based on the whole household income not individual by individual).

Any thoughts gratefully received

Just to add there is no option to sell the apartment due to an onerous doubling ground rent clause that makes it virtually unmortgageable at present. That being said there is Leasehold reform ongoing that may see such punitive clauses abolished, compensation paid my the developers and?or conveyancers or a lowering of the cost to enfranchise the property (where you basically get the freehold to the place and no ground rent - currently this would cost me £40k to do but possibly costs will be vastly reduced once the Leasehold Commission has gone through things).

[Devonian]

Ryan it’s really an Accountant’s question and two Accountant’s might give a different answer. Are you happy to add your wife to the property? You could assign 50% across for example and she’d receive 50% of the income - lots of people do this. I’ve got clients that assign 99% across their spouse on rentals - I’ve had other Accountants and Solicitor’s say that the IR aren’t happy with this. A deed of assignment might be sufficient but again a Solicitor recently would only do it if the mortgage lender was informed and in agreement.

As it’s your only property it ‘might’ be more straight forward. Also the company you work for, they can’t employ your wife can they? Just wondering out loud!

Edit: tax relief isn’t being phased out, only basic rate tax relief will be able to be reclaimed soon, instead of at your highest rate.

[Jeremy67]

As an aside, did your solicitor not draw the ground rent clause to your attention during purchase. I'm no legal expert but if they didn't it might be worth investigating if you have a case there.

[stuie-t]

Similar situation to me. We had the ownership of our rental flat changed so my wife has 99% and I have 1%, therefore she gets 99% of the income from it to use her personal allowance. It shouldn’t cost much in legal fees to do and there is no stamp duty to pay on transfer between married couples.


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[Mr Curta]

We do 50:50 - split property, income and tax responsibilities equally. We could have gone down the 99:1 route but we wouldn't have been comfortable with it and I need to keep on the right side of Ty Glas.

[dandanthewatchman]

Similar situation to me. We had the ownership of our rental flat changed so my wife has 99% and I have 1%, therefore she gets 99% of the income from it to use her personal allowance. It shouldn’t cost much in legal fees to do and there is no stamp duty to pay on transfer between married couples.


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Read the small print on your mortgage before doing this. Doubt they will be wiling to consent to 99% of the beneficial interest being switched to your wife. There is SDLT on the transfer of debt !!! Plenty people screw up on this

Also when you move out and rent you will likely need to remortgage to a BTL mortgage. Your current lender will need to consent and they see letting as riskier than owner occupier

There are also new rules coming in on principal private residence and CGT. Horrible.

As others have said - get advice from an accountant that is VERY up to speed with this type of scenario.

As an aside the dodgy lease rent review clause might be a negligence case against the lawyer


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[ryanb741]

As an aside, did your solicitor not draw the ground rent clause to your attention during purchase. I'm no legal expert but if they didn't it might be worth investigating if you have a case there.

No they were appointed by the developers and absolutely there is a case there (this is the new PPI scandal and millions are suffering - I suspect the remedy will be for the solicitors to pay the enfranchisement fees so it becomes a virtual freehold) but I'll wait for the Leasehold reforms and see what's up).

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[stuie-t]

Read the small print on your mortgage before doing this. Doubt they will be wiling to consent to 99% of the beneficial interest being switched to your wife. There is SDLT on the transfer of debt !!! Plenty people screw up on this

Also when you move out and rent you will likely need to remortgage to a BTL mortgage. Your current lender will need to consent and they see letting as riskier than owner occupier

There are also new rules coming in on principal private residence and CGT. Horrible.

As others have said - get advice from an accountant that is VERY up to speed with this type of scenario.

As an aside the dodgy lease rent review clause might be a negligence case against the lawyer


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Indeed the mortgage will also need to be In joint names, but since when has there been SDLT on debt ?!


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[Boss13]

We have done something similar and happy to forward you some documents which may help.

I will PM you this evening. Short answer to your question: yes it is possible and common.

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[dandanthewatchman]

Indeed the mortgage will also need to be In joint names, but since when has there been SDLT on debt ?!


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Always. Just people ignorant of SDLT which is a vicious and complex tax. Makes sense really. If you own a £500k house without mortgage and gift it to your wife it is exempt from SDLT. However if you own a £500k house with £400k mortgage you only have £100k to gift. The £400k is chargeable consideration.


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[MartynJC (UK)]

Ryan

Speaking from experience - my wife bought a flat for rental income. She submits a separate Income tax form and any income from her flat is separate from any of my income - which I paid PAYE with no tax return form needed as I only had salaried income (at 40% by the way not top 45%).

She got her separate income tax allowances at usual rates.

So if you want to buy a flat - give wife the cash to buy the flat - husband and wife can give unlimited amounts between them - and she can be owner and submit her own tax return form and she will get the standard tax relief on any income minus allowed expenses (not many these days).

Martyn

[Skyman]

Ryan

Speaking from experience - my wife bought a flat for rental income. She submits a separate Income tax form and any income from her flat is separate from any of my income - which I paid PAYE with no tax return form needed as I only had salaried income (at 40% by the way not top 45%).

She got her separate income tax allowances at usual rates.

So if you want to buy a flat - give wife the cash to buy the flat - husband and wife can give unlimited amounts between them - and she can be owner and submit her own tax return form and she will get the standard tax relief on any income minus allowed expenses (not many these days).

Martyn

The flat in question is mortgaged, so I guess Ryan cannot just give his wife the cash to buy a flat.

[MartynJC (UK)]

The flat in question is mortgaged, so I guess Ryan cannot just give his wife the cash to buy a flat.

The deeds then

[dandanthewatchman]

The deeds then

Don’t want to come over as rude ..... but this is just wrong

Ryan - follow some of the advice here and you going to be in a big mess and in trouble with your mortgage company

One of those situations where you aren’t seeking advice on something simple like a watch strap ...... it’s not straightforward and plenty of scope for unintended consequences. Get professional advice.


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[Skyman]

The deeds then

Post #6 deals with this. You cannot just shuffle mortgage liabilities as between H&W, particularly if the wife (in this case) would be unable to afford the mortgage in her (his) own right.

[demonloop]

Read the small print on your mortgage before doing this. Doubt they will be wiling to consent to 99% of the beneficial interest being switched to your wife. There is SDLT on the transfer of debt !!! Plenty people screw up on this

Also when you move out and rent you will likely need to remortgage to a BTL mortgage. Your current lender will need to consent and they see letting as riskier than owner occupier

There are also new rules coming in on principal private residence and CGT. Horrible.

As others have said - get advice from an accountant that is VERY up to speed with this type of scenario.

Some very good advice here. One point though: the current mortgage company should be willing to give you consent to lease, on the understanding that it’s your intention to move back to the property in the future. This saves the hassle, up front costs, and higher interest rates associated with moving to a BTL mortgage.

A friend of mine has had consent to lease for 6/7 years from a high st bank and no problem renewing every year. He cannot get new deals though and is stuck on SVR

[Mr Curta]

I've never needed to switch to a BTL mortgage on the primary home - just advised the lender of circumstances. They will also advise on any percentage they are willing to transfer, I was unable to go 50:50 at one point due to my spouse not earning but changed it once a chunk was paid off.

[Gav]

Please have a look at this Ryan. To change the split of the income the property has to be jointly owned and then the income maybe divided in the split you decide by completing a form 17 and deed of trust. The split of any rental income can then be divided in the proportion of the form 17 election.

https://www.gov.uk/government/public...-and-income-17

[SuperVM]

There may be chargeable consideration on the mortgage:

https://www.gov.uk/guidance/sdlt-tra...nd-or-property

From next year you get 20% tax credit on the interest I believe. Also, you will probably need to ask your mortgage lender for permission to rent out the flat and you can expect probably a one percent increase in interest charge as a result.

[westberks]

Ryan

my accountant was happy splitting my property portfolio income 50/50 with my ex even though 90% of the properties were solely owned by me; not sure if there were a single property you'd be able to apply this but revenue do allow some movement on this.

issues.....

current lender may have a limit to how long you could consent to let; Barclays had a 2 year max; then it needs to be remortgaged to a BTL
current lender may just revert you to SVR, which may be a lot higher than cheapest BTL deals
stamp duty - is liable on 50% of the debt, so if £200k mortgage, wife is liable for stamp on 50% if you add her now. if you are able to reduce the mortgage first, then add her while you still live there, you might minimise this; depends on how much of a hurry you are in. Also will be liable for supplementary SDLT of 3% on new property when you move as you haven't sold your main residence.

I've actually had clients that found it better long term to sell current main resi, move and then buy a smaller BTL that was on a lower debt ratio and could be held in the appropriate name 100%.

it may then be worth remortgaging into joint names on a BTL deal whilst rates are low, to coincide with a move. Also if you need to raise some capital, consider a longer term BTL fixed rate (5 years) as these have more favourable affordability and will permit a larger loan than 2 year deals. Also allows you to split the % ownership so that you have it belt & braces prior to renting.

speak to your IFA/mortgage chap & also accountant though, to ensure you do things in the right & most cost effective order.

good luck!

[ryanb741]

Once again thanks all. Given the current difficulty of getting a mortgage due to the aforementioned doubling ground rent issue (currently £800 per year but doubling every 10 years so you do the maths as to what it would be in 50 years lol - interestingly the lease is over 970 years and I calculated that towards the end of the lease the annual ground rent would be in the £billions each year!) it may well be worth while staying put for now so as not to aggrieve the current lender (who I am paying 1.59% with) and seeing what the Leasehold Commission decides re the enfranchisement for leaseholders. Worst case, even if I went down the enfranchisement route myself and it cost me £30k or so, that £30k spent to turn the property into a virtual freehold would be more than realised in the increase in the value of the place anyway.

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[noTAGlove]

Is it worth keeping your old flat if you decide to move?

Rental yields in and around London are rock bottom, capital growth is highly unlikely and the Government are on a mission to tax BTL landlords out of existence.

[ryanb741]

Is it worth keeping your old flat if you decide to move?

Rental yields in and around London are rock bottom, capital growth is highly unlikely and the Government are on a mission to tax BTL landlords out of existence.

To be honest I want to keep it as it is in a very desireable area and is super easy to rent. I have an eye on retiring to Thailand (albeit in 18 years) and would be nice to have a paid off (by then) flat in an easy to rent area to boost my pension.

Also Capital Growth may be unlikely in the short term (who knows) but long term London is London and I can see a huge influx of Chinese and Korean long term residents in our area which will create demand. But again, who knows? Trade off is it is a 2 bed flat and I could buy a 5 bed detached in somewhere like Bicester for the same value so it is food for thought.

[MartynJC (UK)]

Don’t want to come over as rude ..... but this is just wrong

Ryan - follow some of the advice here and you going to be in a big mess and in trouble with your mortgage company

One of those situations where you aren’t seeking advice on something simple like a watch strap ...... it’s not straightforward and plenty of scope for unintended consequences. Get professional advice.


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I stand corrected. And agree - seek (good) professional advice.

[Bravo73]

...and I could buy a 5 bed detached in somewhere like Bicester for the same value

Have you been to Bicester?

[hansblix2001]

I think it's a good idea to get some professional advice on this - it could be a good idea to sell the property you want to rent out to a company that you own.

[noTAGlove]

To be honest I want to keep it as it is in a very desireable area and is super easy to rent. I have an eye on retiring to Thailand (albeit in 18 years) and would be nice to have a paid off (by then) flat in an easy to rent area to boost my pension.

Also Capital Growth may be unlikely in the short term (who knows) but long term London is London and I can see a huge influx of Chinese and Korean long term residents in our area which will create demand. But again, who knows? Trade off is it is a 2 bed flat and I could buy a 5 bed detached in somewhere like Bicester for the same value so it is food for thought.

London property hasn't always been a one bet...…