My wife and I have jointly bought a property (Tenancy in Common)that we are letting to our son and his friend. We have funded this by increasing the mortgage on our property. Our intention here is to break-even but have a capital gain in 2 to 5 years time. In cash terms the rent will exceed the loan interest. We would ideally like my wife to pay tax at basic rate (I am higher rate payer)but would like to be able to use both CGT allowances when we come to sell. How can we best arrange things to minimise our tax charge?
Iain Stewart
Replies (6)
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90:10
You can't 'elect' for this split, it has to be the truth. How you establish what the truth is when the funds are from a common source, or a mixture of common and discrete sources is a seperate question...
Thus if the truth is a 90:10 ownership, then it follows that this applies to both capital and income taxes.
In almost any other partnership situation, the partners can agree to share income and capital in different proportions. However, if you have such an agreement for property ownership, the Revenue will ignore the agreement and apply their rules for determining the tax bill.
Another point
If you decide not to charge your son rent, presumably there will be no tax payable as the interest will exceed the income from the friend. That way you have no worry about income tax, and can allow the 50:50 split to allow you two CGT allowances. CGT will be payable at each spouse's marginal rate, however, so a 90:10 split may still be prefereable.
Alternatively, let your son have the whole house rent free and he can sublet and shelter the income under the rent a room provisions.
It all depends on the intentions that you have towards the house, your son and his personal circumstances.
Caveat: I'm the tax duffer round here, so don't take my unsupported word for any of this!