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TonyTax
TonyTax, Tax Consultant
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I own two properties, my main home which my wife and I

Resolved Question:

I own two properties, my main home which my wife and I reside in and a property that is leased purchase currently let through a housing agency on a three year term. My question is twofold: What is my most efficient tax route as far as rental taxation is concerned and secondly as far as capital gains tax is concerned when the property is sold?
I have been considering putting the rental property either in joint names (including my wife in a Joint Ownership arrangement) or somehow transferring the property over to my wife. I need to know if either of these options will reduce my tax liability OR if there are other legal methods of reducing incom tax and capital gains tax.
By the way I'm a 40% tax payer but my wife has retired and on a combined pension of around £600 per month.
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.

Hi.

The only way that you can allocate rental income to your wife for tax purposes is if the property is owned jointly or by her solely. If it is owned in joint names, the rental income will be split on a 50:50 basis unless the property is actually owned in proportions other than 50:50 and you inform HMRC by completing a form 17. Your wife would pay less income tax than you whether she had 50% or 100% of the rental income.

As far as Capital Gains Tax is concerned, there are two rates for property gains, 18% and 28%. The rate or combination of rates that you pay is dependent on the level of your income in the tax year of disposal of the property. As a 40% taxpayer, you would pay CGT at 28%. There is the potential for saving CGT as your wife is not a taxpayer. However, whilst she would take a share of your original cost as her own if you put the property into joint names, she would not be entitled to reliefs such as main residence and letting relief which you may be depending on the history of your ownership of the property. Clearly, if the property has never been your main home, main residence and letting relief won't be relevant.

I hope this helps but let me know if you have any further questions.

Customer: replied 1 year ago.
Hi Tony
Firstly, is Tony Tax really your name ? Haha !
Thanks for the prompt answer.
Sounds like the best course of action is to include my wife as joint owner.
Can you please clarify that she could own up to 100% of the property whilst I retain the joint ownership status ? That way she will only be paying 20 % tax........is that right ?
Would I have to see a solicitor to add her in as Joint owner OR is it just a case of filling out a Land Registry form ?
As for the capital gains, if I retire prior to the house being sold then I assume I would only pay capital gains at 18% plus get relief for the time I actually had that property as my main home (1986-1996) assuming that I won't be paying tax at 40% on retirement. Is that correct ?
Many thanks Tony
Kind regards
Amrik
Expert:  TonyTax replied 1 year ago.

My name is***** is just a nickname I use here.

You either have an interest in the property or you don't. The form 17 says:

"You can use this form to declare a beneficial interest if you hold property jointly and:

• you actually own the property in unequal shares, and

• you are entitled to the income arising in proportion to those shares, and

• you want to be taxed on that basis.

If you own 1% of the property, you pay tax on 1% of the rental income, assuming you complete the form 17.

You can have a solicitor complete the paperwork for you or complete it yourself.

What rate of CGT you pay when you retire will be dependent on your income level and the tax rules in place at the time. As of now, you will be entitled to main residence relief and letting relief which will reduce your taxable gain (see Example 9 in HS283). If you transfer full ownership or part ownership to your wife, those reliefs will be lost unless the property is your main residence and the transfer is done whilst it is your main residence. See CG64950 here.

Expert:  TonyTax replied 1 year ago.

.

Customer: replied 1 year ago.
Hi Tony
As I suspected CGT is complicated!
Can I throw a few numbers at you please so that I can get a better understanding of my CGT liability?
I purchased the property in 1986 for £20,000 and moved out in 1996. Therefore lived in it for 10 years.
The property was occupied by my brother until 2015 but he was paying no rent, so I had no income from the property until Jan 2016. In fact I was still maintaining the property so incurring loss each year which was not offset against tax.
The property is now worth £200,000.
What would my approximate CGT liability (£'s) be as a 40% tax payer? If I sold it today.
What would it be as a 20% tax payer?
I only need approximations if this is possible please.
From what you have said so far I think I have to weigh up the saving in income tax (should I include my wife as joint owner) v the amount of relief I would get in CGT should I decide not to include her as joint owner.
Appreciate your help with this
Regards
Amrik
Expert:  TonyTax replied 1 year ago.

I'll get back to you on this.

Customer: replied 1 year ago.
Thank you Tony much appreciated.....
Kind Regards
Amrik
Expert:  TonyTax replied 1 year ago.

If you sold the property in your own name, the gain would be £180,000. The exempt gain would be £69,000 (£180,000 / 30 years x 11.5 years). You are given the last 18 months as a tax free period regardless of whether you live there in that time or not. The taxable gain is £111,000 and you deduct the annual CGT exemption of £11,100 from that to leave a net taxable gain of £99,900 on which you would pay CGT of £27,972 (28%). At today's tax rates and assuming your income was less than £11,000, the personal allowance level, you would pay CGT at 18% on £32,000 and at £28% on £67,900. The CGT would be £24,772. For every £1 of income you have in excess of £11,000, the amount taxable at 18% would reduce by £1. I cannot see HMRC allowing letting relief.

You would lose £34,500 in main residence relief if you put the property into joint names on a 50:50 ownership basis. Your CGT would be £12,432 (£90,000 - £34,500 - £11,100 x 28%). Your wife would have a net taxable gain of £78,900 (£90,000 - £11,100) and pay £18,892 in CGT (£32,000 @ 18% + £46,900 @ 28%). Overall, you would pay about £3,352 in extra CGT between you.

Customer: replied 1 year ago.
Tony that is so very helpful - thank you!
Here are my final thoughts then.....
I plan to sell the property after 8 years. If my wife jointly owns the property at 99% of the shares the majority of the income will be taxed at 20%. Over 8 years that's a saving of over £17,000 in tax (based on the current net rental income of £900).
Either way; when sold, one of us is going to have to pay the majority of the CTG at 28%.
Therefore; I think it would be beneficial for us to take the tax saving now.......does that make sense?
Expert:  TonyTax replied 1 year ago.

Nobody knows what tax rules will be in place in the future so most people would go for the tax saving available now.

Customer: replied 1 year ago.
Tony you have been Brilliant - Thank you so much
Expert:  TonyTax replied 1 year ago.

Thanks.

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