Using spouses lower tax rate-can anyone help with our different circumstances?

[Homeward Bound]

Hello all. Having read threads on this, I am not fully sure how my own circumstances fit so any pointers/advice to help me through this snowy blizzard would be greatly received. I will try and give as many details as I can so as not to miss any important facts!

I bought a house in 2005 with a mortgage and government key worker equity loan and then this year changed mortgage providers and paid off the equity loan removing the second charge on the property. The residential mortgage has always been in just my name and it is the only property I own and my wife does not own any property. My wife and I have lived there since 2005 till 2010.

I am now temporarily (for upto the next 5 years) working abroad (EU) so my wife and I are now renting abroad and I am planning to rent out my house in England, until we move back. I am employed from England (servant of the crown) and pay UK tax and NI and my salary is nearing the 40% tax band. My wife (non EU citizen with Indefinate Leave to Remain with National Insurance number) has no current income but has earnings from a previous tax year, but none from this tax year.

I want to minimise our tax liability on the property (both income and future capital gains). I have already tried the route of putting her jointly on the mortgage but the mortgage provider has refused due to the temporary nature of my current job (as they reassess the mortgage). All is well though for getting "consent to let" from my mortgage provider.

So I need to find a new way forward and on the threads have read a little about "interspousal transfers" and "deeds of trusts" but do not understand which is the easiest and simplist way to rent out the property on a short assured tenency agreement and keep our hard earned pennies out of the clutches of the taxman!

Many thanks in advance for anyone who can help me wipe the snow out of my eyes!

[TaxationPete]

Perhaps you should read this thread.
http://www.landlordzone.co.uk/forums/showthread.php?34215-Using-Spouses-lower-tax-rate-advice-needed-please
Regards Peter

[Homeward Bound]

Thanks Pete, I read the link prior to staring the thread and again now, but still can feel snow in my eyes.

I guess the equity loan issue, living circumstances and wife's nationality aren't so important. Considering the mortgage company will not let me change names on the mortgage (which with my limited knowledge assume = legal ownership through the land registry) am I correct in thinking then that I have to;
-set up a declaration of trust so my wife can have "beneficial ownership" and benefit from the rent income and use her lower tax. Is "beneficial ownership" different to that registered with the land registry? ie. would I still be the legal owner thus not having to register her name with the mortgage company?
-fill out form 17?

Would this then allow any rental income from an assured short hold tenency agreement to be attributed to her and not me?

I read your worked examples of CGT. Is our situation still fine for capital gains ie we can both use the 5years living there plus 3 to offset CGT and its as simple as that? Apologies for my ignorance on these issues - in your examples I did not understant what PRR stands for.

Thanks for any response.

[TaxationPete]

You are the sole owner so only you qualify for PPR and LR Read HS283 on the HMRC web site. You can make your spouse a benefical owner but PPR and LR will not apply. Regards Peter

[Telometer]

You can make your spouse a benefical owner but PPR and LR will not apply. Regards Peter

UNLESS she transfers it back to you prior to selling it.

Make sure you get a solicitor to draw up the trust deed - and get one who understands the tax aspects.

[TaxationPete]

Absolutely.
http://www.hmrc.gov.uk/cgt/intro/glossary.htm
Read the section under Ownership :
There are two types of ownership:

•legal ownership - where the legal owner's name is usually on the ownership papers
•beneficial ownership - where the person who actually benefits from the asset is the true owner
The beneficial owner is usually the one who's liable to Capital Gains Tax.

For example:

•If the deeds to a second home are in the husband's name, he is the legal owner, but both he and his wife may be entitled to the profits from the sale of the house and are therefore joint beneficial owners and jointly liable to Capital Gains Tax.
•If assets are held in a bare trust, the trustee is the legal owner. The beneficiary of the trust is the beneficial owner and is therefore the one who's liable to Capital Gains Tax.

This is why before any exchange of contract the Husband who qualifies for PPR and LR should be the formal beneficial owner. However it would be prudent to run the numbers very carefully as it may be advantageous to allow the wife to retain a share of the beneficial ownership such that any gain on the share would use up her CG Allowance ( £10,100 ) Remember that the relief ( PPR and LR ) would be only on his reduced share of the gain so you need to be able to work this out. You must inform HMRC of the change in beneficial ownership via the Form 17 and ensure it is all in place a couple of months prior to any exchange of contracts. Regards Peter

[Homeward Bound]

Thanks Pete and Telometer for the advice.

I now understand a little more about PPR and LR after reading HS283.

Am I correct in assuming setting up a trust deed means the income would be attributed to my wife (for income tax purposes)? May I also ask how is "beneficial owner" different to my own ownership (ie that on the mortgage and as registered at the land registry)?

How does one go about finding a good solicitor for this who also knows about tax aspects? - ask them? ... or are there any recognised qualifications/memberships I should look out for.

Many thanks as I trudge through the snow!

[Homeward Bound]

Hi Pete

You answered my ownership question as I was writing it!

I can see a thaw in sight.