Our experts review a family tax position for a rental property
Our clients were a married couple who had recently purchased a new home and planned to rent out their previous home. They said:
“We have recently moved to a new home in Oxfordshire and would now like to be able to rent out our old house in London – which we understand has an annual rental value of around £100,000. We know that it makes sense that between us the lower rate tax payer should receive the property income – but our old London home is jointly owned and we want it to stay that way. What are our options?”
How we helped
We confirmed that it was possible for a property to be owned jointly and for one spouse to receive the income if a “declaration of trust” was put into place.
We established that the London property was subject to a mortgage and that this was to continue. We pointed out the considerations in relation to a potential Stamp Duty Land Tax charge on a transfer of the debt between spouses or civil partners and provided an estimate of the charge so that this could be considered in the decision.
We reviewed the income tax positions and provided a summary of the potential tax payable as a result of the income received jointly, compared with the position of the lower earner receiving the whole income. We pointed out the consequences of the lower earner’s income exceeding £100,000 in the future, and the impact of the loss of personal allowances. This is particularly relevant now that relief for mortgage interest is given at 20% against the tax payable and can no longer be claimed as a deduction against the rental income received.
The outcome
The clients were able to make an informed decision on whether to go ahead with the “declaration of trust” so that the lower-earning spouse was taxed on the rental income.
The clients were also aware of the impact of the lower earner going back to work full time, and the potential effect on personal allowances if the salary achieved took their gross income over £100,000.
We can continue to review their tax positions on an annual basis and help with their tax compliance requirements in reporting the rental income on their tax returns.
If in the future, the clients want to sell the London property, we will be able to calculate the potential capital gains tax payable and help with the reporting of the residential property capital gain to HMRC.