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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4348
Experience:  FCCA FCMA CGMA ACIS
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Transfer house to wife saving on rental income

Customer Question

Transfer house to wife for tax saving on rental income If the rented house is under mortgaged single ownership. The owner is a high rate tax payer. The owners wife is a low rate tax payer but the wife is unable to secure a mortgage under her name. What can the owner to reduce tax on rental income by utilising wife's low rate tax band that's acceptable to HMRC?

Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith and pleased to be able to help you with your question. Yes, what you propose is feasible, but you must bear in mind the costs of the exercise, the conveyancing fees and the possibility that the lender will not permit the transfer and, if they do, charge fees. If you have to negotiate a mortgage with a new lender then that will cost too. All in all, this may not be a cost effective scheme, but it does save you Income Tax if you are a higher rate tax payer. I do hope my reply has been of some help.
Customer: replied 2 years ago.

The husband is the single legal owner of the property.

Can the husband lease the house to the wife, the wife has the right sub-let/lease.

The wife pays the husband the lease fees. Husband accounts for tax.

Wife sub-lets to third party, any profit is taxed by.

would this arrangement be acceptable to HMRC

Expert:  bigduckontax replied 2 years ago.

1. Yes he can, provided the terms of the lease permit sub-letting/leasing; no tax consequences, inter spousal transaction.

2. No need to account for tax, inter spousal transaction.

3. Wife accounts for net fees received to HMRC.

4. No question of it 'being acceptable' to HMRC; it is a reality and that Department must accept the position.

Customer: replied 2 years ago.

Just to double check.

The husband is a higher rate tax payer.

The wife is a low rate tax payer.

If the husband lets to property to the wife with permission to sub-let.

lets say for simplicity letting cost to wife is £12,000 per year.

Wife pays £12,000 per year to husband.

Husband deducts mortgage interest cost (£10,000) and 10% wear & tear allowance (£1,200), leaving him a net rental income of £800 on which he pays 40% tax.

Wife sublets and gets and rental income of £20,000.

Wife deducts £12,000 letting costs paid to husband, leaving her a net rental income of £8,000 on which she pays tax at the lower rate (23%?).

wouldn't HMRC view that as tax evasion by the husband because he is moving rental income to his wife whom pays tax at a lower tax rate?

Expert:  bigduckontax replied 2 years ago.
As I told you inter spousal payments are outside the scope of UK taxation so that is a dead duck. By the way the 10% rule is now replaced by actual expenditure on repairs and refurbishments by actual expenditure [Chancellor's Budget proposals].
The wife's sub letting of the property will attract tax on 20K not 8K because the inter spousal transfer is outside the scope of UK taxation.
HMRC might well consider that it is an attempt at tax evasion, but if these transactions are supported by properly drawn up leases they haven't a leg to stand on!