Buy to let for son

Buy to let for son

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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

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By AnonymousUser
12th Jun 2002 12:02

spliting income
If you own the property other than in a 50/50 split, you can elect for the income to be split either 50/50, or in the same proportion as ownership. So, provided you both own enough of the property to be able to use both your CGT allowances, most of the income could go to the wife, if she owns a greater share of the property.

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By AnonymousUser
14th Jun 2002 13:46

Fact
Iain, your question is one that makes tax advisers despair. You have asked what, to you, is a straightforward question about electing for ownership. I can assure you that you are not alone in asking the question and I have been asked it several times. That is why I put my initial posting.

Neil has pointed out the dificulty - oit is practical. If you had bought the house with funds 90% from wife and 10% from husbamd you would have the split. If you have bought them from shared resources, how do you prove the split?

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By AnonymousUser
13th Jun 2002 11:25

90:10
Does this mean that if we elect for my wife to own 90% then this same percentage must be used when calculating capital gain?

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By neileg
13th Jun 2002 15:45

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.

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By neileg
13th Jun 2002 15:53

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!

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By AnonymousUser
12th Jun 2002 20:44

Emphasis needed
Craig has given the correct answer. I want to emphasise one point. If property is jointly owned the initial basis is to split rent 50:50. You can elect to treat it differently so that rent will follow the underlying ownership of the asset. In other words you have 50:50 or reality. You cannot elect for some other basis.

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