Transferring property between spouses is a popular way of maximising rental income. Often, the owner will transfer the property if their partner is in a lower Income Tax band, as any rental income will be taxed at a lower rate, resulting in a better return on investment.
Transferring ownership, or part-ownership, also has advantages in terms of Capital Gains Tax, which is payable on the sale of an asset that has increased in value. For example:
Mr J, a higher rate taxpayer, owns a rental property that has increased in value from £75,000 to £120,000. On its sale, he must pay Capital Gains Tax on the £45,000 profit. Everyone has an annual exemption, which currently stands at £12,000, and once we deduct this, there is a liability of 28% on the remaining £33,000, giving a Capital Gains Tax bill of £9,240.
If Mr J transfers the property to his wife, Mrs J, a basic rate taxpayer, the tax bill is reduced. This is because the Capital Gains Tax rate on property for basic rate taxpayers stands at 18%, so £33,000 at 18% gives a bill of £5,940.
However, if Mr and Mrs J own the property jointly, the financial benefits will be even greater. The £45,000 gain is split 50/50 and each taxpayer can use their £12,000 annual exemption against their proportion of the gain.
Mr J – £22,500 gain – £12,000 annual exemption = £10,500 x 28% = £2,940
Mrs J – £22,500 gain – £12,000 annual exemption = £10,500 x 18% = £1,890
Together, this gives a total of £4,830 in Capital Gains Tax owed.
Where one spouse is in a lower tax band, it often makes sense to consider a full or partial transfer between spouses to make the most of this favourable tax treatment. However, before making a property transfer, you will need to make careful considerations. Particularly, when it comes to Stamp Duty Land Tax (SDLT).
SDLT is payable when you transfer property or land in exchange for something of monetary value, known as ‘chargeable consideration’. If transferring a mortgaged property, there could be a charge from HMRC. If the owner transfers 50% of their property to their spouse and the spouse takes on 50% of the mortgage, the value of that mortgage becomes a chargeable consideration. As this is likely a second property, a minimum of 3% SDLT will be payable.
Although HMRC allows nil gain nil loss transfers of assets between spouses, the case of SDLT is an exception and is something you need to carefully consider as part of your overall tax-planning strategy.
Property tax is complex and we would always recommend that you seek professional advice before transferring a property.
To find out more, contact Martin Frain on 0161 703 2500 or firstname.lastname@example.org.