Property tax questions answered (Part 2 of 10)

9. As joint tenants, are we forced to split the income for tax purpose?

Question: My wife and I own a property as Joint Tenants as opposed to Tenants in Common. Due to our respective incomes, it would be more advantageous if we could apportion all of the income to my wife.

Answer: In order to achieve what you want, i.e. more of the rental income to be taxed in your wife’s name, you need to do two things. Firstly, you need to transfer a corresponding proportion of the property into your wife’s name, either by formal conveyance, or by deed of trust to transfer beneficial ownership. Secondly within 60 days you need to complete a Form 17. (www.hmrc.gov.uk/forms/form17.pdf) and send into HMRC together with proof of the transfer. The result of this will be you being taxed according to the actual proportion of the ownership, and not on a 50:50 basis.

10. Can I transfer the property to take advantage of my wife’s personal tax allowance?

Question: I am currently looking into transferring a rental property into my wife’s name in order to take advantage of her personal tax allowance, half of which she is not using. This could mean the majority of our rental income (about E4,OOO a year) would be tax free.

I understand that I do not have to transfer any legal ownership to my wife, but I will need a declaration of trust. Can I transfer 100 per cent of the property income to my wife and, if so, will all paperwork (bills etc.) relating to the property need to be in my wife’s name?

I have made an appointment to see a tax adviser as I am aware that I need to do this properly, and, like most tax matters, it is a little more complicated than I originally thought.

Answer: What you have written is correct. The beneficial ownership needs to be transferred to your wife, and this can be done by a declaration of trust. If you transfer 100% of the property to your wife, then you will succeed in transferring 100% of the property income to her. All the paperwork relating to the property should be in your wife’s name.

11. Should I buy in sole or joint name?

Question: I am trying to work out what my options are if l/we buy a property to do up and sell on using the equity from our main residence. The question is whether to buy in just my name or in joint names with my husband and, in this particular case, would income be subject to CGT or income tax if we did manage to sell? If we do not manage to sell, my contingency plan would be to rent the property out for a period of time. I am currently not working though if this project succeeds, I might consider future developments. My husband and I currently rent out a property which was our main residence many years ago and is jointly owned and my husband is a 40% taxpayer.

Answer: If you buy a property, do it up and sell on, the profits would be subject to income tax, because this is a trading venture. If you rent out the property, you will be in receipt of rental income, which again is subject to income tax.

In light of the fact that you currently do not work, which I presume means that you have little or no income, but your husband is a 40% taxpayer, it would seem the best option for you to buy only in your name so that any profits will be subject to your marginal rate of income tax i.e. 20% and not your husband’s rate of 40%.

However, you need to consider the effect of buying in your own name, and not in joint names, on the possibility of getting a loan to do the project and the rate of interest you pay your lender, and, if you decide to take out a joint loan, whether you can offset all of the interest against your personal business venture.

12. Can I pay a family member to manage my property?

Question: I have a property in my hometown and live elsewhere. It is currently for sale but being rented whilst trying to sell.

Rather than pay a mortgage company to be on call, can I pay any other family member a nominal monthly fee to be on call for any problems, emergencies, etc. so long as it is similar or less in price than an agency would charge for an equivalent service?

Answer: You can pay a family member to do the job you would have asked an agency to do, and pay them the normal price for the job as long as it is equivalent to a normal commercial arrangement. Make sure regular payments are made from your bank account into a bank account in their name and that the amounts you pay them are reasonable. And that they actually do the job!

13. Look to claim costs as ‘Revenue Costs’?

Question: I have been advised to always try to claim costs as ‘Revenue Costs’ wherever possible. Why should I do this?

Answer: The simple reason is that it improves your cash flow and means that you do not have to wait until you dispose of the property before you can claim the expense. By claiming it is a ‘Revenue Cost’ you can offset it against your annual rental income, which means that ultimately you could be paying little or no income tax.

14. Are these costs of a “Capital” or “Revenue” nature?

Question: Could you please clarify whether the following costs are deemed to be ‘capital’ or ‘revenue’

• Mortgage broker fees i.e. I have paid a mortgage broker a % arrangement fee
• Mortgage lenders arrangement fee
• Property valuation costs

Answer: The Property Income Manual page PIM2105 says: ‘Costs you incur in obtaining loan finance for your rental business are generally deductible in computing rental business profits provided they relate wholly and exclusively to property let out on a commercial basis.

These costs include loan fees, commissions, guarantee fees and fees in connection with the security of a loan.’

This means that a) and b) are classed as revenue expenditures and can therefore be offset against the rental income.

Property valuation costs are dependent on the purpose for which the valuation was obtained. If for the purpose of buying or selling the property, then they will be capital costs. If for insurance purposes, or for the purposes of obtaining loan finance, then they will be revenue expenses. See the Revenue manuals pages PIM2120 and BIM45815.

So, to summarize, a) and b) are Revenue Costs and can be offset against your annual rental income and c) is a dependent on the purpose for which the valuation was obtained.

15. Can Service Charges be deducted?

Question: Can all service charges and building Improvements carried out by a Leasehold Management Company be deducted as a cost from the rental income of a Buy-to-Let property?

Answer: All service charges can be deducted. Building improvements can be deducted if they are revenue expenses but not if they are capital expenses. It is not easy to distinguish between the two but, in a nutshell, revenue expenses are small repairs and general upkeep, like painting and ‘like for like’ replacements, whereas capital expenses are extensions, big repairs and replacements that are a major upgrade from the original.

16. Can we offset our cost?

Question: My wife & I own a flat that we use occasionally at weekends when we visit our hometown in Liverpool. We live in rented accommodation in the south of England due to current work commitments. We plan to rent the flat out on a short-term basis (per night) that will allow us to still have occasional use, and in this tax year we would expect to get around +/- 90 nights of rent. Can we offset the costs i.e. mortgage, council tax and service charges of the flat for the full tax year against income tax on this rent?

We understand that any use of the flat by ourselves would be deducted from any tax relief.

Answer: Here is a quote from the Revenue Property Income Manual page PIM2052 about interest payments but the same applies to mortgage, council tax and service charges:

‘A property may be let for short periods in a tax year or only part of it may be let throughout a tax year (or both); the rest of the time the property is used for private or non-business purposes. Here the interest charged on a qualifying loan on that property has to be split between the rental business use and the private or non-business use. The split is done in whatever way produces a fair and reasonable business deduction, taking account of both the proportion of business use and the length of business use.

You don’t have to split the interest if the taxpayer is genuinely trying to let the property but it is empty because they have not been able to find a tenant. In this case the interest will meet the ‘wholly and exclusively’ test. It won’t meet this test if they have not been trying to let the property or they have been using it for private or non-business purposes.’

17. Can I pay myself for the time spent managing property business?                                                    

Question: I live and run my UK properties from Cyprus. I find that I am spending a lot of time keeping my portfolio up to date, for which I am not being paid. If I was a tax resident of the UK, regardless of whether I paid myself for looking after the rental properties or not, I would still need to declare my worldwide income and be taxed accordingly. This is a ‘catch 22’ situation but as I am a tax resident of Cyprus, I only need to declare my UK income to the UK tax authorities. Therefore, if I pay myself in Cyprus for the work I carry out here with regards to my UK properties, can I then claim this on my tax returns? Obviously, I would then have to declare this to my own tax authority and be taxed accordingly but the tax relief bracket is higher here so less tax would have to be paid.

Answer: On page PIM2210 of HMRC’s Property Income Manual (www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2210), it states:      

‘A landlord can’t deduct anything for the time they spend themselves working in their own rental business.’

So even though you put time and effort into your property business, you cannot put a monetary value on that time and effort and claim it as an allowable business expense, under UK property tax rules.

18. Are these legitimate expenses?

 Question: We purchased four buy to let properties during 09-10. Each one needed decorating and re carpeting prior to letting to make them clean and habitable. We had one boiler condemned and replaced and had to make electrics safe prior to occupation. Are these legitimate expenses to set against our tax liability for 2015-16?

Answer: If you look on the HMRC website on the Property Income Manual pages PIM2030 & PIM2505:

www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2030 www.hmrc.qov.uk/manuals/pimmanual/PlM2505.htm

You will see that if the property was in a fit state to rent out when you purchased it and the purchase price was not significantly reduced due to the property being in a bad state, then any standard ‘repairs and renewals’ that would be allowable against rental income in the middle of tenancy are similarly allowable before the first tenancy begins.