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Property Income Higher Rate Tax payer

Property Income Higher Rate Tax payer

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HI

I hope you can help with the following which probably happens quite often but seems to be unreasonably difficult to restructure :

Two partners have purchased properties separately in their separate names as residential property in 2006.

The married in 2007 and started living in one of the properties being their main residence.They have rented the other one (owned solely from the husband)

The husband is a higher rate tax payer! The Property Income from the rented property is taxed at the higher rate for the husband.

Because it is not a jointly owned property they can not opt to apportion the Property rental income and transfer let's say 50% to the wife.

It looks like the method of Form 17 and (deed of trust etc..) can not help in the scenario.

I believe that if they sell the second property in 2015 they will also have to pay CGT on gain arising for the period from which it has been rented 2007 to 2012 (three years before sale)

Hopefully the Property Relief of £40K will apply and if you add the CGT relief of £11K they may avoid the potential CGT if it is less that that.

However, Rental Income is still an issue.

Transferring Legal ownership is going to be complex (mortgagees and cost involved)

Transferring only a beneficial ownership may be an option, but not sure if it will satisfy HMRC requirements.

There must be some form of legal arrangement allowing for the partners(married couple) to agree the split of the income.

Thank you for your input.

Replies (5)

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By MJShone
16th Jan 2014 16:00

Declaration of trust

If the husband makes a valid declaration of trust that he holds the property for the two of them in proportions laid out in the document, that's enough to transfer an equitable interest to the wife. The property would then be jointly owned and you could follow the form 17 route. That obviously only takes effect from the date of the declaration of trust. Transfer of beneficial ownership in this way will certainly satifsy HMRC requirements. However, lenders may have to be advised of the change of beneficial ownership.

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By hkfinancials
16th Jan 2014 16:22

Three years before sale? Not any more

Just as an aside - from April 2014 the last 18 months will be deemed as owner occupied.

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By ACDWebb
16th Jan 2014 18:05

Letting relief will probably not apply

as If I read the query correctly it is the second property that is to be sold i& that s the rented property and they have never been lived in it and used it as their Only Main Residence.

Lettings rrelief only applies where the property has been used as their residence at some time and also let. The relief is then the lesser of:

£40kthe OMR/PPR relief due - and as noted the final three years exemption in any event drops to 18 months from April.the gain relating to the let period

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By mhtax
16th Jan 2014 19:08

Who lived in it prior to the marriage?

If he lived in it before they moved into the marital home, he will get the fist year, andthe last 18 months ppr, and up to 40k lettings relief. It will depend on the numbers whether taking joint ownership so that lower tax on part of the rent, and an additional cgt exemption are worthgiving up half the PPR.

If he hasn't lived in it then there is a pure gain, and if joint ownership put in place 2 annual exemptions.

Moving to joint ownership is neither complicated nor expensive when it is just husband and wife involved.

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By Richieinspain
16th Jan 2014 21:45

Contact the Land Registry

In respect to your rental income:

 

mhtax is spot on when he says that;

Moving to joint ownership is neither complicated nor expensive when it is just husband and wife involved.

Just contact the Land registry and request for the wife to be included as a joint owner. This shouldn't cost more than £350.  As the transfer is between husband and wife there is no CGT.  As there is a mortgage, depending on the value of the house, liability for stamp duty may arise for the transferred value of the mortgage (but i'm not 100% sure about this)  

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