How can we minimise the tax on our buy-to-let property?

16 May 2016

Q

My wife and I recently let out the home we bought in 1986 as tenants in common.

A letting agent is handling everything and it pays us the £650 monthly rent minus its charges.

What is the best way of minimising our tax liability? Should we share the rent equally for income tax purposes, or state that my wife is the landlord and takes all the income as she will be a non-taxpayer in a few years’ time when she retires?

If we split the income equally, is it true that we are each allowed an amount of tax-free rental income each year?

From
IO/Mansfield

A

You will be familiar with the phrase “Don’t let the tax tail wag the investment dog”, and I think the same may apply here. It may be tempting to have all the income in your wife’s name, but first work out approximately how much tax you would actually be saving. Remember that you won’t be taxed on the whole rental income – you would be able to deduct the agent’s fees and any other costs such as repairs and maintenance.

You also can’t just designate the income as your wife’s; you would have to transfer ownership of the property to her as well, which would incur fees and legal costs. And if you ever want to sell the property in future, you would probably want to transfer back into joint names in order to use both of your annual capital gains tax allowances – incurring further fees.

You need to be careful because if this transfer into your wife’s name is carried out shortly before a sale, HM Revenue and Customs may deem the transaction as invalid under anti-avoidance rules. You would need to ensure that any income received in the period after the transfer is declared on each of your tax returns, which may increase the income tax paid.

 

The change to your wife’s ownership may also affect your wills and have inheritance tax implications. At the moment, you can each pass your share of the property to beneficiaries of your choice – surviving spouse, children, perhaps a will trust – which can help with your estate planning.

So the first question to ask is whether the tax saving would be worth it if it creates these other potential problems. You say that your wife will be a non-taxpayer when she retires, so presumably she is currently a taxpayer? In that case you would not have to do anything until she retires.

At that point, you could transfer up to £1,050 of her personal allowance to you, provided that you are not liable to income tax above the basic rate. This would at least reduce the tax on your share of the rental income, even if it doesn’t get rid of it altogether; and it would certainly be easier than changing the ownership.

 

Joint property ownership

 

Moneywise says: You can own a property as either ‘joint tenants’ or ‘tenants in common’.

The type of ownership affects what you can do with the property if your relationship with a joint owner breaks down, or if one owner dies.

Joint tenants

As joint tenants (sometimes called ‘beneficial joint tenants’):

  • you have equal rights to the whole property
  • the property automatically goes to the other owners if you die
  • you can’t pass on your ownership of the property in your will

 

Tenants in common

As tenants in common:

  • you can own different shares of the property
  • the property doesn’t automatically go to the other owners if you die
  • you can pass on your share of the property in your will