How SDLT could change how rented property is owned by married couples/civil partners.
By Kevin McDaid, Nov 6 2018 11:56AM
Gary & Tina, a married couple from Bradford, purchase a BTL in 2016 for £130,000.
Gary is a higher rate taxpayer via his employment whilst Tina pays no tax in respect of her part time employment. They have 3 young children.
The BTL produces an annual rental profit of £3,000 per annum. If the property was jointly owned the default position would be that the rental profits would be split 50/50 creating a £600 income tax liability for Gary, whilst Tina would pay no tax. As they have 3 children, child benefit will be jeopardised if Gary’s total taxable income exceeds £50,000.
It certainly makes sense to consider transferring the beneficial ownership of the BTL solely or partly into Tina’s name. Let us assume that Tina can receive the full £3,000 rental income without being liable to pay any tax. This will save the couple £600 in tax each year until they come to dispose of the property in 2020 (total saving after 4 years £2,400).
In 2020 the property will sell for £155,000. It was purchased for £130,000. The gain would be as follows:
Property Purchase 2016 130,000
Disposal 2020 155,000
Anticipated CGT annual exemption in 2020 12,500
CGT (property investor rate)* 18% 12,500 2,250
*Assumes BR tax taxpayer
The obvious suggestion would be transfer the property back into joint ownership prior to the sale in order to benefit from a second annual CGT exemption of £12,500. This would result in there being nil CGT payable. Remember CGT is NOT payable on interspouse transfers.
However, if the property had a £80,000 mortgage on it, the transfer from Tina to 50/50 joint ownership would create a transfer of consideration of 50% of £80,000, i.e. £40,000 liable to SDLT at 3% = £1,200.
Until 01/04/16 SDLT would not have been an issue had the ‘deemed consideration’ been below £125,000. Now, with legal costs of transferring the property in addition to the SDLT, the tax savings to be made from the transfer become relatively small. Indeed, was it even worth transferring the property into Tina’s sole name in the first instance?
A potential solution would be to transfer over just under £40,000 of the mortgage from Tina to Gary in order to avoid the SDLT charge. This would mean that Gary would not quite own 50% of the property and so the gain may be split, say 51/49 in favour of Tina. As a result Tina would be liable to CGT on £250 at 18% = £45. Gary would not pay any CGT.
As a couple, they pay no income tax on the rental income, no SDLT on the transfer back into joint ownership, and save over £2,200 in CGT by following this course of action.
What had been standard practice up until 04/2016 (automatically transferring property from the individual lower tax paying spouse back into joint ownership in order to benefit from a second annual CGT exemption) is no longer, necessarily, the ‘no brainer’ that it once was. More number crunching required I am afraid.
Kevin McDaid, For & on behalf of Tax Facts Ltd
UPDATE – On 22/11/17
The Government announced that married couples (such as Gary & Tina) would be allowed to transfer property between them where the consideration is < £125,000 WITHOUT TRIGGERING AN SDLT LIABILITY. The couple simply have to be living together at the date of the transfer. Once the £125,000 threshold is exceeded, standard SDLT rates will apply as opposed to the 3% surcharge. Thus, had Tina been transferring a 50% share in a property to Gary with an outstanding mortgage of £260,000, Gary would be deemed to be taking over £130,000 of the mortgage, creating an SDLT liability of £50 (1%). Had this ‘minor amendment’ (as it was called) not taken place a £130,000 consideration would have created an SDLT liability for Gary of £3,950 (i.e. £125,000 at 3% and £5,000 at 4%) – saving of £3,900 for G & T.
I am aware that many solicitors and conveyancers appear to be unaware of this change, as at the date of writing (06/11/18). As it is almost a year since its introduction, I would hope that this will become more widely known as an increased liability of £3,900 for G & T in the above example is not something that they should have to stand just because ‘professionals’ are failing to keep up to date with changes in legislation.
What our clients said about us:
I have a portfolio of over 50 residential properties throughout the North of England.
I first came across Kevin in 2010 when he was performing capital allowances valuations in respect of houses of multiple occupation (HMO). At that point, not many accountants that I spoke to, had much of a clue about the ability to claim the allowances whilst many of those organisations who were in the know, were keen to do the valuations for a hefty fee but then really did not instil me with any confidence about the tax implications.
Kevin was different; we had an initial chat over the phone, there was no big sell and no hefty fee. Because he has a tax and surveying background, not only was he able to undertake the valuations he was able to liaise with my accountant to fully explain the tax implications and talk him through the reporting procedure.
There is no question that the tax savings I made hugely outweighed his fees.
Fast forward 5 years and there is no surprise that, once again, he seems to have a far greater understanding of the latest tax changes than the accountants of other landlords that I regularly speak with.
He has kept me fully updated on the tax implications of the loss of wear and tear and the changes in the allowability of loan interest. He has provided me with an in depth report showing how much post tax income I would have from the present day right through until 20/21 when the restriction is fully in force. It did not paint a pretty picture. In fact, I would go so far as to say, that I would almost certainly no longer be able to continue to operate as a property investor by 20/21 in a sole trader capacity. Consequently, as of 01/04/16, I am now operating as a limited company, Kevin guiding me and my accountant through the tricky incorporation maze and explaining the best profit extraction method going forward.
I would point out that we had been discussing the SDLT implications of incorporation on the run up to the Budget on 16/03/16. With over 50 properties this was going to be a hefty charge for me. We had anticipated there would be a relief for the transfer of more than 15 properties into company ownership. When it was announced in the Budget that this would not apply, Kevin contacted me on Budget day whilst I was in South America to break the news and to push for the transfer to take place by 31/03/16 in order to save an extra 3% SDLT, which I duly did.
Once again, big tax savings for reasonable costs but, most importantly to me, I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business.
It really is a no brainer to work with Kevin whether you are a large or small property investor.
We first used the tax services of Kevin almost 10 years ago when he was working for a local firm of chartered accountants. Having received an excellent service from him for a number of years (including expanding from a partnership to a limited company) we were delighted to hear that Kevin had set up on his own and had no hesitation in signing up as a client in 2012. He continues to offer a very personable and cost effective service. We would absolutely recommend him to any other small company like ours.
In addition to our company, we have a small residential property portfolio and were contemplating disposing of one of the properties in 2014/15. Had we not consulted with Kevin prior to the sale, we would have been facing an unwelcome Capital Gains Tax Liability. However, by transferring the property from sole into joint ownership we were able to benefit from a second CGT exemption which saved us almost £2,000’.
Mrs S (Company Director, Bingley)
I first met with Kevin in July 2015 because I was worried that I had been receiving rental income for 3 years but had not declared anything to the tax man. The reason I had not done so was because I had spent quite a bit doing it up when I first purchased it and, by my calculations, I had only just started to make a profit in the tax year ended 05/04/2015.
Kevin explained that not all the expenses would be allowable because some counted as improvements. He provided a fact sheet on ‘Revenue versus Capital’ indicating that those costs that counted as improvements would, ultimately, be available to set against any gains on disposal of the BTL. He also clarified the other expenses I was entitled to claim.
He calculated the net profit from letting. Even though no tax was payable he advised that the income still needed to be reported to HMRC which he duly did via a letter as, he said, the amounts involved were below the level for which a tax return was required. Apparently, this saved me penalties for failing to submit tax returns by the due date.
A tax return will be required for 2015/16 and I will be using Kevin to prepare this as, last year, he took away my concerns in sorting out my tax in a professional manner. He is not expensive and I feel comfortable dealing with him.
I would be happy to recommend him based on my experience.
BLOG INDEX - PLEASE SCROLL DOWN TO VIEW INDIVIDUAL ENTRIES.
How SDLT could change how rented property is owned by couples/civil partners.
CGT Reliefs on homes to be significantly restricted from 04/2020
Mortgage Interest Relief Restrictions - Are you ready?
Making Tax Digital (MTD) & the cash basis for landlords
Landlords lose legal challenge over BTL tax changes
When the sale of a property will be liable to Income Tax rather than CGT
CGT on BTL to be taxed as income - Don't worry, it is not going to happen
The Statutory Residence Test - Working full-time abroad
Replacement Furniture Relief.
How flexible are your pensions savings?