advice about transferring ownership for rental purposes

[qwerty2]

My partner and I have lived in a house for about 5 years. I bought it as a (structurally sound) wreck and he has spent the last few years doing it up as well as looking after our children. There is a tiny mortgage left on the property.

We now want to move, and are thinking about doing much the same again, buying a wreck and doing it up to our taste. The area that the house that we currently live in is being massively redeveloped, and I strongly suspect that the house will be worth far, far more in 2-5 years than it is now.

My income is fairly high and I suspect the tax on the rent will be quite substantial. My partner is thinking about doing the same as here - working on the house and garden rather than getting a job, which solves a lot of afterschool childcare probs too.

So... we are thinking about transferring the current house into his name which gives him an income, probably just above the personal allowance and taking out a new mortgage, in my name only, for the new one to avoid having to pay tax on the rent and capital gains tax on the house when we eventually sell it in 2-5 years. He would also take on the landlord responsibilities that I am really not keen on.

Is this legally OK, or are there hidden pitfalls?
(we are not married, but I trust him)

[MrWoof]

Two suggestions;
1. Post this in the Tax Questions forum.
2. Don't do it. That is based on personal experience and friends' experiences. Partnerships and marriages do not always last and when they break up its usually tears all round. A close friend whose earnings put him in the higher tax bracket put almost enough money to buy a house into his soon to be ex-wife's name, guess who keeps the money. Sorry to put a downer on it but I lost everything once and yes, I am bitter.

[Tax Accountant]

My partner and I have lived in a house for about 5 years. I bought it as a (structurally sound) wreck and he has spent the last few years doing it up as well as looking after our children. There is a tiny mortgage left on the property.

We now want to move, and are thinking about doing much the same again, buying a wreck and doing it up to our taste. The area that the house that we currently live in is being massively redeveloped, and I strongly suspect that the house will be worth far, far more in 2-5 years than it is now.

My income is fairly high and I suspect the tax on the rent will be quite substantial. My partner is thinking about doing the same as here - working on the house and garden rather than getting a job, which solves a lot of afterschool childcare probs too.

So... we are thinking about transferring the current house into his name which gives him an income, probably just above the personal allowance and taking out a new mortgage, in my name only, for the new one to avoid having to pay tax on the rent and capital gains tax on the house when we eventually sell it in 2-5 years. He would also take on the landlord responsibilities that I am really not keen on.

Is this legally OK, or are there hidden pitfalls?
(we are not married, but I trust him)

(1) It seems that the house is your only or main residence throughout the period of your ownership. If so, you will have no CGT to pay so long as you don't sell within 3 years of moving out. If you let the property in the meantime, you will have a lot longer than 3 years within which to sell the property and still not pay any CGT.

(2) It seems that you are more concerned about the income tax on rents rather than the CGT on selling. Therefore, you are proposing to transfer the property to your partner, apparently free of charge. There is no benefit to you of doing this as there is no CGT anyway if you sell at full market value to anyone else. However, if you transfer it to your partner and he lets the property in his name, he has no mortgage of his own and therefore he does not have any loan interest with which to reduce his rental profits. Also, he will not have used the house as his only or main residence 'during his period of ownership' since the transfer, and therefore he will be struck with CGT liability on any subsequent sale. As he has taken over the property free of charge, ie nil cost, and he is not legally related to you, there is a possibility that his eventual gain will be calculated by reference to his NIL cost, i.e. on the full sale price. This will be unthinkable.

If you must transfer the property to him, you should transfer it at full market value and take a first charge on the property for the full value at which it is transferred, i.e. you are giving him a private interest-free mortgage. This will mean that there is saving in income tax on rental profits whilst still protecting your value in the property in case things turn sour between the two of you. Also his eventual CGT will not be as much as it could possibly be if takes over the property at NIL cost.

(3) I think that there is a much simpler solution. re-mortgage the house to its full current value and use the funds to buy your next house. The loan interest will be eligible to reduce your rental profits and you will also continue to benefit from CGT exemption for lot longer than 3 years after moving out. Any additional income tax on rental profits, compared to your partner, is a very small price to pay in the overall equation.

The re-mortgage proceeds used for buying the new house will mean that you will not have to finance the loan interest out of your taxed income as would be the case if you took out any direct mortgage on the security of your new house. Remember that there is no tax relief on the interest on a loan secured on, and used to buy, your new home.

If your partner would like to see a property in his own name to give him comfort, you could consider buying the new property in joint names.

(4) Finally, what monetary value would you put on this advice?

Ramnik