Can I transfer rental income to keep salary below £100k?

Dear Mike Warburton

QI was wondering if you could provide some help with our conundrum in your excellent column.

My partner and I are not married. He has a flat he rents out but, with the extra income from this, he is at risk of just going over the £ 100,000 earnings threshold at which we would lose our free childcare hours and taxfree childcare which would cost us roughly £ 7,000 a year. Is there any way he could transfer the rental income to me?

We live in a house owned in my name (with a declaration of trust and a joint mortgage) and do not want my name on the deeds to the flat so we could avoid second-home stamp duty if we move. We can’t sell the flat as it is having cladding remediation work which won’t be completed for years.

As an aside we have two children and would probably have got married were it not for the cladding crisis meaning we needed to avoid second-home stamp duty – romantic, no?

– Rebecca

Dear Rebecca

AFree childcare is obviously a welcome support for the many parents coping with the costs of bringing up a family – always assuming that you can find a child-minding service with spaces available.

Unfortunately, the rules include various complications and you have highlighted one of these. The £ 100,000 limit is based on “adjusted net income” which you can work out using the HMRC online guidance. Most pertinent for you is that this income includes rental profits.

When I wrote about this recently, many readers correctly pointed out that one of the adjustments allowed is for pension contributions, and that is an alternative approach which you could consider.

Putting money into a pension can lower your income, so you can come in under the threshold.

The income limit you mention is calculated on an individual rather than a household basis so your question is whether your partner could transfer across his rental income to you. This may be possible – but again it is not straightforward.

Income from property is assessed by HMRC according to the “beneficial ownership” of the property concerned, which is not necessarily the legal ownership, with special rules applying for married couples.

You say that you do not want to be the legal owner of his rental property. In principle your partner could agree to pass a beneficial interest to you in the whole or part of the property using a declaration of trust, but retain his legal ownership. In that case you would be assessed on the rental profit rather than your partner.

You have not said whether he has a loan on the property. If he has, you would need the bank or building society to agree to your plan.

The lender may agree to do so, but it will want to be satisfied that the security is preserved with both a charge on the property and proof that there is income available to service the repayments and interest, something it may find easier if you were married.

You will also need to consider capital gains tax (CGT). The transfer would be treated as a disposal at market value for CGT purposes.

You have not said what he paid for the flat, but I suspect that it was less than its current market value.

Unfortunately, the CGT annual exemption for 2024- 25 will only be £3,000. As a higher-rate taxpayer your partner would be liable to pay CGT on the excess at the reduced rate of 24pc, as announced in the Budget, but I suspect that this will still be a problem.

This would not be an issue if you were married.

Stamp Duty Land Tax ( SDLT in England) is calculated on the consideration involved. This would include any debt transferred from him to you in this arrangement.

This raises another issue because SDLT is also based on beneficial rather than legal ownership. If there is any consideration this would be caught for the 3 percentage point stamp duty surcharge on second homes, for which no lower threshold applies.

The HMRC manuals are helpful in explaining these rules. In particular, they also have a number of relevant examples.

You have two children and say that you would probably have married if it were not for the cladding issue and the additional stamp duty on second homes. I can understand why you were keen to avoid the surcharge, but the rules on this operate only at the day of purchase, so a subsequent marriage should not trigger extra stamp duty. This is made clear in the HMRC manuals.

In addition, I do not think you should be worrying about the surcharge if you later move home. If you are selling your main residence and buying a new main residence, the surcharge should not apply. I think you are holding off marriage unnecessarily.

If by answering your question it leads to both a saving in capital gains tax – and a wedding – that would be particularly pleasing.

Tax Tips

Mike Warburton was previously a tax director with accountants Grant Thornton and is now retired.