One of easiest and basic strategy to deal with the Section 24 is a transfer of ownership (either 100% or some other proportion) to your spouse or partner if he/she is basic rate tax payer and you are higher rate tax payer.
This strategy was used by many landlords in the past to reduce income tax bill and capital gains even before the introduction of this dreadful restriction on interest relief. However, it will be more useful than ever in this new world of Section 24.
But, bear in mind, that this strategy may not be suitable for all cases.
You should consider this option only if you expect your spouse’s income would be less than basis rate threshold which £46,350 for tax year 2018/19 (increasing to £50,000 from tax year 2019/20).
The first question to ask for planning this.
Know Expected Taxable Income of Your Spouse
At this point you will not only have to know the expected taxable income but you will also have to know the rental income.
Then, find the difference between the taxable income and basic rate threshold to find out how much rental income you can transfer to your spouse.
If your wife or husband has a total taxable income of £30,000, then you can transfer a property that yields annual rental income (before mortgage interest) of £16,350 (£46,350 basic rate threshold less taxable income of £30,000).
So, if you are a higher rate tax payer and own three flats, each has rental income (before interest) of £16,350, transfer one flat to your spouse’s name.
If your annual mortgage interest is £10,000, the total tax saving from this strategy will be £3,000 per annum from tax year 2020/21.
Let’s consider another situation where your spouse has income equal to personal allowance.
Mr. Michael owns seven properties with total rental income (before mortgage interest) of £75,000. He has the annual interest of £45,000 and does not have any other income. Until tax year 2016/17, he was basic rate tax payer as his net income was £30,000 and pays tax at 20%.
However, after Section 24 regime, he suddenly becomes higher rate tax payer. By transferring property that earns a rental income of £30,000 (& mortgage interest of £20,000) to your spouse, you can save tax of £6,000 per annum from tax year 2020/21.
Sounds Simple Isn't it?
Although there is no SDLT when you transfer your property at nil consideration (i.e. free) to your spouse, the situation is complicated when mortgage involved.
In SDLT rules, the transfer of a mortgage from you to your spouse can be treated as consideration, and SDLT is charged on mortgage amount.
If you transfer a property worth £300,000 with a mortgage of £200,000 to your spouse, then £200,000 is treated as consideration, and stamp duty is levied on this. However, if you repay the mortgage and transfer the property at nil value, then there is SDLT payable.
So, way around this is to pay the mortgage and then transfer the property to your spouse. Then, obtain a new mortgage in your spouse’s name! But, structure this in such a way not to appear as tax avoidance scheme!
Any Other Things to Consider?
Besides tax rules, you need to consider legal implications of the transfer of the property to your spouse. Think about what if your relationship with your spouse deteriorates and you file for divorce!
The tax rules itself has many facets, and so you need to consult with property tax specialist before deciding on the strategy specific to your situation.
Please refer to our tax guide on tax tips for jointly owned properties for further guidance on this.