In recent months, the Chancellor of the Exchequer (formerly Mr George Osborne) launched an ‘attack’ on the property market by first ensuring that non-resident owners of UK situs property were liable to UK Capital Gains Tax (CGT) to the more recent changes to Stamp Duty Land Tax (SDLT) and mortgage interest relief being capped at 20%. Therefore more and more individuals are looking at possible ways of restructuring their current and future property portfolios to minimise the tax exposure.
The purpose of this month’s property section is to outline some of the tax issues surrounding jointly owned property
to some more unusual methods of mitigating a tax liability.
Jointly Owned Asset
If you are to acquire a property in partnership with another individual (this could be your spouse, relative or friend), then the income and gains realised on that property will need to be assessed on both parties.
If you are married or in a civil partnership with the other party that you own the property with, then any rental income or gains on disposals will be treated as being earned 50:50 for each party as a default position. It is possible to elect to have the rental income and gains to be apportioned to each individual in the same proportions as the initial capital contribution. However in order to do this, a number of compliance documents need to be filed in the required time-scales otherwise the default 50:50 treatment will apply.
Mr and Mrs A purchase a property for £200k with Mr A contributing £150k of the capital and Mrs A the remainder.
The default position is that all income and gains that are realised from this property will be split 50:50.
However, if Mr and Mrs A wish, they can elect for 75% of rents and gains to be attributable to Mr A with the remaining 25% attributable to Mrs A.
Making the election and declarations can often be beneficial if Mr A’s total income is less than Mrs A and therefore subject to tax is in a lower tax bracket.
If however you are not married with the individual that you acquire a property with, then the income and gains realised from a property would typically be split in the ratio of the share in the property that you own. This is unless you have agreed a different allocation in advance with your property partner.
Another possible issue of Jointly owned assets is the recent changes to SDLT (the additional 3% surcharge on an additional property acquisition).
If you are to acquire a new property (maybe as your new main residence with your partner / wife) and one of you owns another property, then it is most likely that you would need to pay the additional 3% surcharge on the acquisition of this new property. This is regardless of whether the property acquisition is actually your first property purchase.
‘I lived in the property that I now rent 20 years ago, that means that it is completely exempt from any capital gains tax right?’
This is unfortunately not the case. There is a relief for your main residence called Principal Private Residence Relief (PPR) but this typically is only applicable on the periods of actual occupancy of that property and the last 18 months of ownership. There are many complicated rules and exemptions as well with regards to this.
‘If I reinvest 100% of the sale proceeds of one property into another, I don’t have a tax liability’
Again, this is unfortunately not true. Each asset is seen as separate assets in the eye of HM Revenue and Customs which means that regardless of what you do with the proceeds on the disposal of an asset, this is most likely to be subject to Capital Gains Tax.
‘Because me and my wife own the property, we can choose who pays tax’
Further to the above, we already know this is not true as there are specific rules relating to jointly owned assets (with further consideration required as to whether the individuals are married or not).
As you can see, property tax for landlords in the UK is becoming more and more complicated and with the rules regarding mortgage interest relief being capped at 20% taking effect from 6 April 2017, it is strongly advised for individuals to start planning for the future.
If you would like to find out more about how Wisteria could help you plan your property tax affairs in a more tax efficient manner, then contact one of our property tax experts on 020 8429 9245 or email [email protected]