“I’ve gifted half my rental property to my spouse, is that a problem?”
Understanding gifts of property
With the gradual removal of higher rate income tax relief on rental property finance costs (typically mortgage interest) from this April, more higher rate tax payers might be inclined to gift part, if not the whole, of their interests in rental properties to their spouse or civil partner. They are probably aware that a transfer between spouses or civil partners (we’ll refer to both as spouses in this article) doesn’t create a capital gain on which capital gains tax is payable, and is exempt for inheritance tax purposes (except in certain cases involving non-UK domiciles) – hence the assumption.
However, that’s only part of the story – there’s also Stamp Duty Land Tax (SDLT) and income tax to consider – let alone can a transfer be done, and is it legally effective?
How does SDLT and mortgages affect gifts?
Let us look at the latter two points first. If the property is subject to a mortgage, then a transfer cannot be made without the formal consent of the lender – and in the scenario envisaged here, there is likely be a mortgage on the property. Furthermore, a gift of an interest in a property must be in writing to be legally effective – a verbal declaration is not good enough. This is often done by using a deed of gift rather than necessarily changing the land registry entry.
The existence of the mortgage creates an issue for SDLT. Typically, the acquirer will become partly liable for the mortgage debt and to that extent has effectively “paid” for the property an amount equal to the mortgage share taken over – which means that there is “consideration” given for SDLT purposes.
The SDLT issue was not much of a problem because the amounts involved were typically below the SDLT threshold. However, following the introduction of the 3% surcharge for “second properties”, SDLT is now more of an issue since the threshold for this is only £40,000 – a figure easily exceeded by a share of mortgage taken over. This charge could apply even where the two spouses haven’t increased the number of properties they hold between them – merely reallocated how they are held.
Income tax and gifts
Now to income tax, which is the main reason for making a transfer in this example. The starting point is that income from property owned jointly between spouses is taxed on them equally, irrespective of the actual underlying ownership. Thus, income from property owned 90%/10% is taxed 50%/50% – any capital gain is taxed 90%/10%.
If the spouses want to be taxed on income in the ratios of 90%/10% in this case, instead of equally, they must complete a Form 17 and submit this to HMRC together with proof of these proportions (e.g. copy of the deed of gift). This form is effective from when it is signed and must be submitted within 60 days of signature – this is not the same as backdating an election, as some people think. The election can only be made to tax income in the real ownership proportions, and not some other proportions the spouses would like. The election ceases if ownership proportions change, so that a new election is required. Interestingly, Form 17 doesn’t apply where property is held in a formal partnership, or if it meets the requirements to be a furnished holiday letting.
If you think the Form 17 has been overlooked, speak with your usual Kreston Reeves adviser as soon as possible to minimise the damage.
Transfers between individuals not married or in a civil partnership have additional complications in that capital gains tax may be payable (even if nothing is paid for the property share), and for inheritance tax the gifts are only “potentially exempt” (becoming exempt if the donor survives the gift by 7 years) – but Form 17 doesn’t, of course, apply.
Further advice on property gifts
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