Answering your burning questions on reducing tax, sharing profits, rental properties and tax savings!
I’m a higher rate taxpayer with a rental property and my spouse does not work – if only there was a way I could reduce the tax I am paying on my rental profits?
Well, funnily enough, there is. Let’s assume that the property that is let by the higher rate taxpayer yields a nice round £10,000 profit. As a result, the tax due (at 40%) on those profits would be £4,000.
If only I could share those profits with my spouse – is that possible?
Yes, you could and take advantage of your spouse’s unused personal allowance, meaning that some or even all of the profits wouldn’t be taxed at all in your spouse’s name.
Sounds great – How can I do this? Is it complicated and do I have to deal with a lot of paperwork and contact the land registry?
No and no. It is possible to have a declaration of trust (DoT) drafted by a solicitor to transfer a beneficial interest in that property to your spouse, rather than going through the rigmarole of transferring the legal title and notifying the land registry.
The most effective way to do this where one is higher rate and the other not paying tax at all would be to give your spouse a 100% beneficial interest in the property. If you do this, it is crucial that your tax advisor prepares and submits a Form 17 to HMRC within 60 days of the DoT being signed, otherwise the rental profits will be taxed 50:50 regardless of the fact that your spouse has been given a 100% interest. With a DoT and Form 17 in place, this could save £4,000 in tax based upon the scenario mentioned above.
My spouse and I have only just got married – I’m not sure if I want to give them 100% of MY property, despite the tax savings?
Then don’t! Taking advantage of HMRC’s default position, where without a Form 17 in place, rental income that is joint with your spouse/civil partner is taxed 50:50, you could give them just a 1% beneficial interest in the property to make it joint (keeping the remaining 99% yourself) but benefit from the default 50:50 split of the profits for tax purposes. This will still save £2,000 in tax based on the scenario mentioned above.
Is there anything I need to be careful of?
Yes, if the property in question is encumbered by a mortgage, then care is required so as not to breach your lender’s terms and the SDLT position is given due consideration by your solicitor.
Thanks – those are really good tax savings!
What is more, these could be annual tax savings if your tax positions remain the same, it really is the gift that keeps on giving!