CGT if transfer house title

[neetugopal]

This is my first post, sorry if it has been asked before.
We lived in our last house from Dec. 2000 to June 2006. I own the house out rightly. We bought another house and moved into it in July 2006. The new house is also in my name and mortgaged. We are renting out our old house from Aug. 2006. I would appreciate greatly if somebody could answer following questions

1. Is it legal from tax point of view to transfer our old house in my wife's name so that we don't have to pay any income tax (my wife is not working and annual rental income is less than £5k( on rental income. Would it be seen as a tax avoidance measure?
2. If it is legal and I decide to transfer house under my wife's name then do we have to pay CGT on the house when we sell. I have heard that it should be free of CGT for the next 3 yrs as it was our main residence for more than 5 yrs. I am not sure if it would be affected by transferring house title.
3. If it may be seen as tax avoidance then would it be better to take (re)mortgage on the rented property and offset mortgage interest against rental income. Property is currently valued at £80k. How much I can take remortage for?

Many thanks in advance..

[Tax Accountant]

This is my first post, sorry if it has been asked before.
We lived in our last house from Dec. 2000 to June 2006. I own the house out rightly. We bought another house and moved into it in July 2006. The new house is also in my name and mortgaged. We are renting out our old house from Aug. 2006. I would appreciate greatly if somebody could answer following questions

1. Is it legal from tax point of view to transfer our old house in my wife's name so that we don't have to pay any income tax (my wife is not working and annual rental income is less than £5k( on rental income. Would it be seen as a tax avoidance measure?

2. If it is legal and I decide to transfer house under my wife's name then do we have to pay CGT on the house when we sell. I have heard that it should be free of CGT for the next 3 yrs as it was our main residence for more than 5 yrs. I am not sure if it would be affected by transferring house title.

3. If it may be seen as tax avoidance then would it be better to take (re)mortgage on the rented property and offset mortgage interest against rental income. Property is currently valued at £80k. How much I can take remortage for?

Many thanks in advance..


It is not unusual to do this and certainly not illegal or considered as tax avoidance.

If you are still the owner when it is sold, you have the PPR relief for the period until you moved out plus the final 3 years ownership, lettings relief, taper relief and annual exemption. On this basis, there will not be any CGT issues for many years, perhaps as many as another 8 years.

However, as you have already moved out of the house, and your wife will not have used it as her only or main residence at anytime in her ownership, she may not be able to claim any PPR relief ot lettings relief if and when she later decides to sell the property. This advice is not free from doubt and there are conflicting opinions in this respect.

It may be the case that although both houses and both mortgages are in your names, they were actually intended to belong to both of you. In this case, you are both already the beneficial owners and this is what matters rather than the actual name on the title deeds. If this is the case, you should effect a trust deed and make clear that this was the case from the beginning. You could then go on to amend the joint ownership to the effect that the house now belongs 99% (or any other percentage) to your wife.

You could remortgage it upto its full value at the time lettings commenced and are able to claim full loan interest against rental income. You could use the remortgage advance to reduce your home mortgage on the new home.

Ramnik

[neetugopal]

Thanks Ramnik for a very good advice. I will probably go for remortgage option as there seem to be less hassle in that. I may use the money to put as deposit on buying another BTL but not sure whether it's a good idea considering house prices.

[Tax Accountant]

Thanks Ramnik for a very good advice. I will probably go for remortgage option as there seem to be less hassle in that. I may use the money to put as deposit on buying another BTL but not sure whether it's a good idea considering house prices.

(1) At the very least, I would seriously consider Trust Deed route to at least make the property 50:50 jointly owned.

(2) I would also seriously consider same for your new property, in case you wish to start letting this in the future.

(3) If you are using the re-mortgage proceeds to buy another BTL, there is no limit to the amount you can raise from either the existing BTL or even from your current main residence. Any interest on a loan used towards buying a BTL will fully qualify to be deducted as an expense of your lettings business.

(4) I am a firm believer in investing in residential or commercial properties rather than leave money in a bank. This is subject to the main qualification that you must be as certain as possible that you will be able to let the property most of the time without too much difficulty, now as well as in the future. This means that it must be in a good location where there is good tenant demand. I have not known many people (if any) who have regretted investing in properties in the longer term. This is not investment business advice and you should think very carefully before proceeding, especially if you are not an experienced investor.

Ramnik

[neetugopal]

Thanks again for the detailed reply. I shall look into 50:50 Trust deed. I am very naive when it comes to legal matters, I take it that it would have to be done through a solicitor and a painless procedure.

[Tax Accountant]

Thanks again for the detailed reply. I shall look into 50:50 Trust deed. I am very naive when it comes to legal matters, I take it that it would have to be done through a solicitor and a painless procedure.

A Trust Deed will be a simple agreement stating, for example, that the property has always been beneficially owned by both of you and furthermore that you now wish your wife to have her beneficial interest extended to, say, 99% (or any other %).

It could be done by anyone but it is best to have a solicitor prepare one and explain the legalities before it is signed. This way there are no disputes at a later date as to whether you understood the agreement or not. It will also carry more authenticity if anyone should choose to challenge your wife's beneficial ownership of 50% or 99% or any other % you choose to adopt.

The solicitor's cost should also be very minimal.

But make sure that you are happy to have your wife own 50% or 99% of the property in case she should want to sell it and keep all the proceeds.

Above all, the Trust Deed should only recite the truth and you should not say something in a Trust Deed if it was not the truth.

Ramnik

[neetugopal]

Somebody recently suggested to me that I can offset mortgage interest upto the value of rented property from the mortgage I took on our new home. Just to recap I own (no mortgage outstanding on it - current value £80k) and lived in a house which is currently rented out since Aug 2006. We bought and moved into our new house in July 2006 having mortgage of £144k. It was my intention to utilize rented income from old house to pay mortgage repayment on current house.

Is it possible to offset mortgage interest on £80k from the rental income on our old house? Please be aware that loan is not secured again the rented property so does it matter?

[Tax Accountant]

Somebody recently suggested to me that I can offset mortgage interest upto the value of rented property from the mortgage I took on our new home. Just to recap I own (no mortgage outstanding on it - current value £80k) and lived in a house which is currently rented out since Aug 2006. We bought and moved into our new house in July 2006 having mortgage of £144k. It was my intention to utilize rented income from old house to pay mortgage repayment on current house.

Is it possible to offset mortgage interest on £80k from the rental income on our old house? Please be aware that loan is not secured again the rented property so does it matter?

There are a lot of different opinions on this, not to mention that many professionals are not even aware that a let property, which was previously a main home, could be remortgaged upto it's value at the date it entered lettings business.

It is best to seek professional advice if this issue is sufficiently important to you.

Ramnik

[islandgirl]

Sorry if this is slightly off-thead but many posts here have mentioned re-mortgaging a rented property. We have approached our bank about this and they say that, as the rental is not 130% of the loan repayment if we borrow the amount we require, they will not help. The buy to let property is owned by ourselves - no current mortgage. Obviously the rental income is not our only means of repaying the loan and we can easily "top up" the difference. The bank could also have security on the new property we will buy with the loan. We cannot see why this is a problem. Does any bank or building society have a more enlightened attitude??