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Husband and Wife- Rental income. tax planning.

Declaration of trust, Form 17/ Stamp duty on transfer.

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Husband is an addition rate tax payer; wife is a basic rate payer, so makes sense to shift income to wife. They have two buy to let properties.

Buy to let Property A.
Owed in joint names.  Value around £800k and a mortgage of around £600k.
I am comfortable with the process of organising the declaration of trust to change beneficial ownership followed by the submission form 17 (within 60 days).

No CGT applicable on transfer. Based  on my understanding  no stamp duty is applicable as the property is already in joint names, but would like to confirm because ,if the beneficial ownership percentage also applies to the mortgage than , the transfer value may be well over £125k so stamp duty me be due.

Buy to Let Property B
Owned in sole name by Husband. Assuming same value of £800k and a mortgage of £600k.
Same process as above with the transfer to wife under the declaration of trust of trust /form 17 etc.

Again no CGT, but stamp duty would be applicable as wife would be taking over the mortgage. However I would advise that the Wife not to take over the mortgage( if bank allows this) so no stamp duty would be applicable.

It would follow on that in due course when the rental profits are calculated, as W will have no mortgage so no interest to deduct against her share of rental income. The question is, would H be restricted to his % beneficial share of the property or be able to deduct 100%. I think his share would be restricted but would appreciate comments on this.

Thank you in advance

Replies (5)

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Portia profile image
By Portia Nina Levin
04th Dec 2017 15:49

First things first Martin, it's STAMP DUTY FRIGGING LAND TAX!!!!

In scenario 1 the wife is deemed to assume a further X% of the mortgage as consideration. Where X% is the difference between her percentage ownership before and after.

Justin Bryant will tell you that you can transfer the husband's £100K (ie an additional 12.5% share) equity without SDLT, and that loads of people do it, with the help of a SDLT specialist lawyer. Your clients might wish to consider doing so, at their own peril.

In scenarion 2 there is no need to file a form 17, because the asset will not be held (legally) in their joint names.

SDLT situation is as before, but Justin Bryant will let the wife have a 25% interest SDLT free.

Thanks (1)
By Tax Dragon
05th Dec 2017 09:16

Martin B wrote:

I would advise that the Wife not to take over the mortgage( if bank allows this) so no stamp duty would be applicable.

This is (essentially) Justin's 'solution'. One issue that I have seen overlooked in most of the very many threads on this topic is that if the Wife does not take on the liability for the interest (or indeed if She does not pay the interest), then She is not entitled to (income) tax relief for the interest. 'Assuming liability' means taking on the mortgage. In turn, that means SDLT.
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By Martin B
05th Dec 2017 11:17

Thankyou PLN.
Scenario 1
So to avoid SDLT, the aim would be for the wife to take on an additional mortgage of less than £125k. Say for argument £120k.
This would mean she would be left with £420k mortgage and this is 70% of the total mortgage. So H can transfer an additional 20% to wife. Does this work?
Not sure the thinking behind the 12.5%

Important Question if ownership was changed to ‘tenants in common’ with 99% W and 1% H split. Would SDLT still be an issue?

Scenario2. Not sure where your 25% comes from. £125 of £600 is 21%.
You say form 17 is not required, so going forward the income /expenses would be included in tax returns on revised percentages. Would it be better for a formal transfer of legal ownership by change from sole ownership to tenants in common?

Tax Dragon- I was asking if Husband was still able to get 100% relief on interest.

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Replying to Martin B:
Portia profile image
By Portia Nina Levin
05th Dec 2017 12:30

The £125K is a red herring. If the consideration exceeds £40K it is liable to SDLT, and the first £125K is chargeable at 3%, not 0%.

So the 12.5% was calculated like this. Each party has 50% of the £800K value, which is £400K and half of the liability, which is £300K. That means the husband's" equity, which can be transferred tax-free is £100K, which is 12.5% of the £800K.

In the second instance, the husband has the whole £800K and £600K, so can transfer his "equity" of £200K (which is 25% of £800K).

I don't think that "changing it to "tenants in common makes any difference. They can only have unequal interests if they are tenants in common.

You will need to consult with Justin or similar though, because I don't think that it works.

The point is - and this makes Tax Dragon's "objections" irrelevant - that the whole mortgage is secured on the whole property. The wife can't legally take an interest in the property that is not subject to the mortgage. What happens if there's a fracking disaster 'neath the 2nd example property tomorrow, and its value falls to £300K?

Justin says that the wife owns£75K worth, and the husband owns £225K worth, less a debt of £600K. Justin's wrong.

However, I'd just let somebody like Justin do the work, file the SDLT return, and let them get sued if the [***] ever hits the fan in relation to SDLT.

Then you only need to concern yourself with the CGT and IT issues. That would mean that you need to address Tax Dragon's issue.

I think that's a non-issue under historic rules, because the legislation defines what the income is (=profits), and how the income gets split. It may be an issue in relation to the new rules in relation to interests on dwelling-related loans.

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Replying to Portia Nina Levin:
By Tax Dragon
05th Dec 2017 13:32

I agree my "objections" are "relevant" in relation to Justin's view and not to yours (that was supposed to be implicit in what I said). I disagree re the historic position - I would say Justin has a question to answer under the old rules too.

(You are answering that question through the lens of your view - which view Justin does not share, so he cannot have your answer!)

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