How mar­ried cou­ples can re­duce the tax bur­den of buy-to-let

Tax­ing Times

Yorkshire Post - Property - - PROPERTY NEWS -

Robert Peel, tax ex­pert, Gar­butt and El­liott, www. gar­butt-el­

THE TAX changes brought in with ef­fect from April 5 2016 should be on in­vestors’ radar as they re­late to the tax­a­tion of rental in­come from buy-to­let prop­er­ties. They af­fect the tax relief you get in re­spect of fi­nance costs and re­place­ment of soft fur­nish­ings. Need­less to say these changes will re­sult in most tax­pay­ers pay­ing more in in­come tax.

We are al­ready well into the first year of these changes and for the cur­rent tax year, relief on 25 per cent of your fi­nance costs will be re­stricted to the ba­sic rate of tax. Over the next three years this relief will be fur­ther re­stricted un­til the tax relief on all of your fi­nance costs will be lim­ited to the ba­sic rate of tax only. For this pur­pose, fi­nance costs will not just re­late to the mort­gage in­ter­est you pay but will also in­clude any ad­di­tional costs of bor­row­ing, such as the fees the bank charge you for set­ting up the loan.

In ad­di­tion to the re­stric­tion on fi­nance costs, the for­mer al­lowance to cover the price of re­plac­ing soft fur­nish­ings when you let a prop­erty fully fur­nished has also changed. You will no longer be able to claim a stan­dard al­lowance of 10 per cent of the rental in­come. In­stead you will now be re­stricted to the ac­tual costs of re­place­ment.

Our clients have been ask­ing us if there is any way the re­sults of these un­ex­pected and un­wel­come tax in­creases can be re­duced or avoided. If you are mar­ried or in a civil part­ner­ship and either of you own a prop­erty in your own name then the short an­swer is that there may be an al­ter­na­tive avail­able to you if the cir­cum­stances are right.

This is due to the spe­cial rules that ap­ply to in­come re­ceived by mar­ried cou­ples from joint­ly­owned prop­erty. The ba­sic rule is that in­come from joint­ly­owned prop­erty is split equally be­tween spouses re­gard­less as to how the prop­erty is ac­tu­ally owned. These spe­cial rules al­low mar­ried cou­ples to vary the share of in­come on which they pay tax be­tween them­selves. This is re­ferred to as a form 17 elec­tion af­ter the num­ber of the form on which mar­ried cou­ples for­mally no­tify HM Rev­enue & Cus­toms (HMRC) on how prop­er­ties are owned be­tween them and how in­come should be ap­por­tioned be­tween spouses.

There are two ways in which these rules can be ap­plied to re­duce the over­all tax bill.

The first is by mak­ing a form 17 elec­tion un­der cir­cum­stances where the le­gal own­er­ship is not 50/50. So, for ex­am­ple, if you are a higher rate tax­payer and your spouse is a ba­sic rate tax payer or doesn’t pay tax at all then con­sider gift­ing 75 per cent of the prop­erty to them and mak­ing an elec­tion so that the rental in­come is split 25/75 in­stead of the more usual 50/50. Don’t for­get that gifts be­tween spouses are ex­empt from tax so any gifts can be done with­out in­cur­ring any tax li­a­bil­i­ties. You may have to give HMRC some ev­i­dence of the ac­tual split of the own­er­ship by us­ing a dec­la­ra­tion or deed.

The sec­ond way is by gift­ing your spouse a small per­cent­age, say five per cent, of the prop­erty and then not mak­ing an elec­tion on form 17. As men­tioned above, the ba­sic rules are that HMRC will au­to­mat­i­cally ap­por­tion in­come on a 50/50 ba­sis un­less an elec­tion is made so re­gard­less as to the ac­tual own­er­ship HMRC will sim­ply split the in­come 50/50.

If you want to make an elec­tion you need to do this be­fore April 5 in or­der for the elec­tion to ap­ply for the tax year start­ing on April 6 2017. Un­for­tu­nately, you can­not back­date the elec­tion.

Also bear in mind that that the elec­tion can cover any joint in­come sources and not just rental in­come so can ap­ply to other as­sets as well as prop­erty.

Robert Peel is pri­vate clients man­ager at Gar­butt and El­liott, which has of­fices in Leeds and York.

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