Mortgage interest relief

Transfer of 99% beneficial interest of BTL to wife; mortgage remains in husband's name

Didn't find your answer?

It is commonly suggested that in order to transfer rental income to the lower taxpaying spouse a declaration of trust is entered into followed by the submission of Form 17 to HMRC. The husband retains 100% legal ownership and the lender is kept in the dark (righly or wrongly).

However, the question of the tax relief on the mortgage interest seems to be overlooked as 99% of the husband's mortgage relates to his wife's buy-to-let business. If the HMRC guidance at SAIM 100030 and Example 3 at SAIM 100040 is followed (in the context of qualifying loan interest) there would appear to be a problem in that there is no income tax relief for the wife as she has not taken out a mortgage:

"However, where one spouse takes out a loan which is then used by both a husband and wife to invest the money in a form that otherwise meets the qualifying conditions, relief would only be available to the spouse that took out the loan."

However, the guidance concerns the rules for qualifying loan interest rather than in the context of buy-to-lets. I'm still concerned as each spouse reports their respective shares of gross rent and expenses on their tax returns as if a separate business (in contrast to a partnership where the net profits are reported).

Members' views would be appreciated.

Replies (22)

Please login or register to join the discussion.

Portia profile image
By Portia Nina Levin
15th Jun 2017 11:22

SAIM10030 (not SAIM 100030) and SAIM10040 (not SAIM100040) are not relevant. They apply to interest relief claimed under ITA 2007, Pt 8, Ch 1. Those sections of the manual deal with a specific application of the provisions in that chapter which only grant relief for interest paid to the person who took out the loan and pays the interest on the loan. They actually concern an effective widening of the otherwise narrow provisions in the case of joint, husband and wife, loans.

Relief for interest in relation to loan interest for a property business, even where given as a tax reducer relies on business income principles, which in turn relies on GAAP.

It is not legally possible to give your spouse 99% of the unencumbered property whilst retaining 100% of the mortgage liability that encumbers it. The two are indivisible.

While the property is subject to a legal mortgage ir is the mortgagee lender that actually owns the property. The mortgagor borrower has an interest in the property that gives them possession and enjoyment of the property, and entitles them to legal ownership of the property once the mortgage is repaid.

If 99% of that interest is transferred to the wife, she has effectively assumed 99% of the loan. SDLT is payable accordingly, unless the 99% transfer is effected by means of a transfer into a partnership (or LLP) between the husband and the wife.

Thanks (1)
Replying to Portia Nina Levin:
Galaxian
By Galaxian
19th Jun 2017 10:54

The point I'm making is that the wife does not assume any of the mortgage because she has only obtained a 99% beneficial interest - this can be achieved by entering into a declaration of trust which is a private document - 100% legal ownership remains with the husband, so nothing changes as far as the lender is concerned. This of course could be technically in breach of the mortgage's terms and conditions but I've seen plenty of these sorts of cases nevertheless.

The question is whether she can claim 99% of the mortgage interest in these circumstances bearing in mind her husband is paying all the interest. From what you are saying, under general principles, 99% of the interest is not wholly and exclusively for the purposes of his rental business.

Thanks (0)
Replying to Galaxian:
Portia profile image
By Portia Nina Levin
19th Jun 2017 11:12

And the point I'm making, is that that cannot be done legally. Go back and read what I wrote, particularly in relation to who has what interest in the property.

Let's say the house is worth £500K, and the mortgage is £300K. You're suggesting that it is possible to transfer £495K of house to her while the husband keeps £300K of debt and only £5K of house. That cannot be done.

The £300K debt is secured on the £500K house, and the two things cannot be separated from one another. In the event of default, the mortgagee (who is the legal owner of the house) gets to sell it, have their debt repaid, and holds the balance as constructive trustee for the beneficial owners.

What I am saying is that, whether she likes it or not, the wife is assuming 99% of the debt. When the husband pays the interest, he pays 99% of it on her behalf.

If you don't know how to do it properly, don't do it at all.

For SDLT purposes, read FA 2003, Sch. 4, para. 8.

Thanks (0)
Replying to Portia Nina Levin:
Galaxian
By Galaxian
19th Jun 2017 11:19

If you think separation can't be done legally, then I suggest you read this (this is a more extreme version in the context of incorporation of buy-to-lets): https://www.property118.com/beneficial-interest-company-trust/91418/

The barristers review the T&C's to see whether the transfer of a beneficial interest is prohibited.

I never suggested that I intend to implement such a strategy - I said I've seen plenty in practice.

Thanks (0)
Replying to Galaxian:
Portia profile image
By Portia Nina Levin
19th Jun 2017 11:38

Are you suggesting that the purpose of the "beneficial interest company trust" (a bare trust with a fancy name) leaves the debt with the individuals, whilst transferring beneficial of the properties (with no debt) to the company? What would be the purpose of that?

EDIT: Oh, I see that you're another person that's comfortable with an equitable transfer of the beneficial ownership of real property, but cannot fathom the equitable ramifications in relation to the debt secured on that property.

Thanks (0)
Replying to Portia Nina Levin:
Galaxian
By Galaxian
19th Jun 2017 11:54

With the beneficial interest company trust (which I don't advocate), the debt gets included in the company accounts (and the company claims the mortgage interest) yet the original borrower remains unchanged. However, the legal and beneficial ownership of the properties are separated.

I never said I was comfortable with entering into a declaration of trust without the lender's knowledge. My query concerned the deductibility of the interest if this happens.

Thanks (0)
Replying to Galaxian:
Portia profile image
By Portia Nina Levin
19th Jun 2017 12:10

Well apparently you're willing to accept that if a man makes a transfer of 100% to a company, the company gets a deduction for 100% of the interest, but you are not willing to accept that when he makes a transfer of 99% to his wife, that she can get a deduction for 99% of the interest. Why the anomoly? Becuase it's on property 118.

Ignore the fact that there is a barrister's opinion. Barristers will sit whichever side of a fence you want them to for the right price.

Thanks (0)
avatar
By Justin Bryant
19th Jun 2017 12:25

I more or less agree with PNL (re BTL etc. general interest deduction principles, see https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/s...), but there is another way to avoid the SDLT here on the mortgage assumed without the need for a p-ship that has been mentioned on this website before.

Thanks (0)
Replying to Justin Bryant:
Portia profile image
By Portia Nina Levin
19th Jun 2017 12:29

And which involves trying to conjure up the pretence that the person being given the beneficial ownership of the property, can get it free of any part of the debt that encumbers it.

There are two parties to a mortgage; the mortgagor (aka the borrower) and the mortgagee (aka the lender). The mortgagee has a security interest in the property, which gives them all the rights of ownership (they can dispose of the property without the mortgagor's consent, but hold any excess of proceeds, over the amount needed to repay their debt, as trustee), and the mortgagor holds the remaining interest, being the rights of possession, occupation and enjoyment, and to receive the absolute interest once the mortgage debt is discharged (they cannot dispose of the property without the mortgagee's consent, and when they do, they act as agent in relation to the mortgagee's interest).

Now as a matter of general law, you cannot give someone more (a greater interest) than you have and neither can a trustee hold something for the benefit of somebody else, unless they have it.

So all that can be transferred is the interest that the transferor has in the property, and that interest is a residual interest, after the mortgagee's security interest. They own 100% of such an interest and can only transfer a proportion of that; in making such a transfer, they are transferring a proportion of the net position, being a proportion of the property, subject to a corresponding proportion of the debt.

May be this is better explained in Lee Young's posts here: http://www.taxationweb.co.uk/forum/transfer-of-beneficial-interests-and-...

Thanks (0)
Portia profile image
By Portia Nina Levin
19th Jun 2017 12:16

Let me offer you a parallel.

My friend Alex has just bought a lovely Audi R8 on HP in a nice new limited company, due to some duff advice off the internet.

Alex is now going to sell it to me for it's worth less the amount of outstanding HP (that I'm completely aware of, before we go down the HPA 1964, s 27 road).

Now I don't like Alex very much, so I think I can stiff him by flogging the Audi, but not paying off the HP.

I'm wrong though; guess who's paying off the HP, if they want to sell the Audi?

Thanks (0)
Replying to Portia Nina Levin:
avatar
By Justin Bryant
19th Jun 2017 12:28

Portia, from your above responses it's clear that you misunderstand how the alternative solution to avoid the SDLT (assumed on the debt) works (it worked also under the former SD regime).

Thanks (0)
Replying to Justin Bryant:
Portia profile image
By Portia Nina Levin
19th Jun 2017 12:39

You mean people also used to get away with it under the former SD regime, Justin. There is either consideration or there isn't consideration. Just saying there isn't consideration doesn't mean there isn't.

Thanks (0)
Replying to Portia Nina Levin:
avatar
By Justin Bryant
19th Jun 2017 14:32

There is a very respectable technical argument (that most (if not all) STPG members agree with) that if the DoT is carefully drafted no SDLT arises for the transferee re the mortgage, since nothing changed in this respect on the treatment of this planning in the transition from SD to SDLT in 2003.

Thanks (0)
Replying to Portia Nina Levin:
avatar
By Tax Dragon
20th Jun 2017 17:35

Portia Nina Levin wrote:

Just saying there isn't consideration doesn't mean there isn't.


Just as having a clause in a deed that says that the beneficial owner can call upon the legal owner to transfer legal ownership does not mean that the legal owner has the capability of transferring the legal ownership?
Thanks (0)
Replying to Justin Bryant:
Galaxian
By Galaxian
20th Jun 2017 07:28

Justin, does this involve transferring a share of the net equity only (the bit the mortgage company aren't interested in) with the declaration of trust stating that the spouse is not assuming any of the mortgage?

Thanks (0)
Replying to Galaxian:
avatar
By Justin Bryant
20th Jun 2017 09:38

No. These documents need to be drafted by a lawyer in any event under LSA 2007, so you should consult an SDLT specialist lawyer.

Thanks (0)
Replying to Justin Bryant:
Galaxian
By Galaxian
20th Jun 2017 11:13

What's this article in Taxation referring to then?

https://www.taxation.co.uk/Articles/2016/01/26/334258/anything-declare

"If there is a mortgage on the property care must be taken only to transfer the net equity between the couple. Not only is a transfer of the mortgage interests likely to breach the terms of the mortgage with the lender, but being a transfer of an interest in land it could also trigger a stamp duty land tax (SDLT) liability if the sum outstanding is more than £125,000."

Thanks (0)
Replying to Galaxian:
avatar
By Justin Bryant
20th Jun 2017 14:28

The author does not spell out the specific drafting needed to achieve the nil SDLT filing position and is in any event wrong as effectively the gross property value interest ignoring the mortgage must be transferred (i.e. without the associated mortgage liability).

Thanks (1)
avatar
By Tax Dragon
19th Jun 2017 14:08

Portia, might the order of payments make a difference, technically? If wife makes funds available from which husband pays the lender, the payments he makes may be said to be on her behalf in respect of her liability to the lender. If he pays the lender from his own resources, there is then presumably a liability from W to H. That liability may be enforceable, but it is also secondary to and distinct from the mortgage.

Thanks (0)
Replying to Tax Dragon:
Portia profile image
By Portia Nina Levin
19th Jun 2017 14:21

No. Not in my opinion. And there is no "secondary" liability from the wife to the husband.

The debt attaches to the asset (albeit that the legal owner of the asset is also the legal debtor). The people own the asset, subject to the debt attached to it. Any interest (in the asset) that is transferred is a part of that; the two things cannot be separated from one another - they are both components of the interest that is being transferred.

Thanks (0)
Replying to Portia Nina Levin:
avatar
By Tax Dragon
19th Jun 2017 14:54

Thank you. I appreciate your replies on this thread and previous ones.

Thanks (0)
avatar
By Tax Dragon
20th Jun 2017 08:09

Galaxian, I would maintain your healthy scepticism of these arrangements. There is a reasonable argument (if not a default position) that, if H remains liable to, and pays, the lender, then what happens is that equity passes (back) to him. W might buy that off him again, maybe, by reimbursing him, but then what she pays is not interest - it is consideration.

Thanks (0)