Can my spouse and I reduce tax on our property investment?

How to increase your after-tax profit despite the UK property tax changes

I was asked by a couple last year how they could reduce the tax they would pay on their property investment income. They were worried about whether property investment is worth it after the UK property tax changes. David is a higher rate taxpayer, and Debbie pays tax at the basic rate. I referred them to a tax specialist, and he’s helped them save at least £12,000 in tax between 2016 and 2021. Here’s how he did it.

A successful property portfolio, hampered by tax

David and Debbie own several properties in joint names. They have built this portfolio over several years, and so it produces very valuable income. In total, the gross rental income is £40,000. Mortgage interest payments total £12,000, as does the investment management, maintenance, and other expenses associated with the property. The profit before tax (PBT) of the portfolio is £16,000.

Neither David nor Debbie expect their tax positions to change in the coming years. For the sake of tax calculation and profit projection, David and Debbie, together with their tax advisor, decided to calculate the future with all figures based on no change in rent, mortgage payments or expenses between 2016 and 2021.

How much might the mortgage interest tax relief changes cost David and Debbie?

If David and Debbie do nothing and leave their portfolio as it is, this is how their income, profit, and tax position will evolve between 2016 and 2021:

 

David 2016/17 2017/18 2018/19 2019/20 2020/21
Rental Income 20,000 20,000 20,000

20,000

20,000
Mortgage Interest 6,000 6,000 6,000 6,000 6,000
Profit Before Tax 8,000 8,000 8,000 8,000 8,000
% Interest Relief 100% 75% 50% 25% 0%
Taxable Interest 0 2,000 4,000 6,000 8,000
Taxable Profit 8,000 10,000 12,000 14,000 16,000
Tax Liability 3,200 4,000 4,800 5,600 6,400
Deduct 20% Tax Credit 0 400 800 1,200 1,600
Total Tax Liability 3,200 3,600 4,000 4,400 4,800
Profit After Tax 4,800 4,400 4,000 3,600 3,200
Debbie          
Rental Income 20,000 20,000 20,000 20,000 20,000
Mortgage Interest 6,000 6,000 6,000 6,000 6,000
Profit Before Tax 8,000 8,000 8,000 8,000 8,000
% Interest Relief 100% 75% 50% 25% 0%
Taxable Interest 0 2,000 4,000 6,000 8,000
Taxable Profit 8,000 10,000 12,000 14,000 16,000
Tax Liability 1,600 2,000 2,400 2,800 3,200
Deduct 20% Tax Credit 0 400 800 1,200 1,600
Total Tax Liability 1,600 1,600 1,600 1,600 1,600
Profit After Tax 6,400 6,400 6,400 6,400 6,400
Total Tax Paid 4,800 5,200 5,600 6,000 6,400
Total Profit Made 11,200 10,800 10,400 10,000 9,600

As you can see, because of the phasing in of the mortgage interest tax relief changes, the couple’s tax rises and their profit falls over the five-year period. Sure, they are still making money, but their investment risk is the same while their reward is falling. This isn’t the way that property investment is supposed to work, is it?

The answer for David and Debbie might be to restructure how they own the property.

The benefit of restructuring your portfolio in favour of a lower tax spouse

If David transfers his share of the property to Debbie, she makes all the profit. It’s not enough to put her into a higher tax band, and so she will pay basic rate tax on the profit. Here’s how the numbers stack up now:

Debbie

2016/17 2017/18 2018/19 2019/20 2020/21
Rental Income 40,000 40,000 40,000 40,000 40,000
Mortgage Interest 12,000 12,000 12,000 12,000 12,000
Profit Before Tax 16,000 16,000 16,000 16,000 16,000
% Interest Relief 100% 75% 50% 25% 0%
Taxable Interest 0 4,000 8,000 12,000 16,000
Taxable Profit 16,000 20,000 24,000 28,000 32,000
Tax Liability 3,200 4,000 4,800 5,600 6,400
Deduct 20% Tax Credit 0 800 1,600 2,400 3,200
Total Tax Liability 3,200 3,200 3,200 3,200 3,200
Profit After Tax 12,800 12,800 12,800 12,800

12,800

It would mean that the couple increases their profit after tax in 2016/17 by £1,600. Additionally, they will pocket £2,200 more in 2020/21 than they will if they make no changes. Over the five years, they get to keep £12,000 more of their profits that the taxman would otherwise have been paid. However, there is a potential problem with this strategy.

The Capital Gains Tax Trap

If David simply transfers his property to his wife, if they want to sell in the future they will lose the benefit of David’s allowance against capital gains. It could undo all the tax the couple saved by transferring the property in the first place. In fact, were they to sell over a period of a few years, they could end up paying more tax than they saved.

So, how could you structure a property portfolio between spouses and bank the tax benefits of doing so while retaining the CGT benefits of joint ownership?

The benefits of using a trust

The answer to this conundrum for David and Debbie is to restructure using a Declaration of Trust and file a Form 17 with HMRC. The trust transfers David’s share of the rental profits to his wife, while the legal title of the property portfolio remains unchanged.

Should you do a ‘David and Debbie’?

David and Debbie tackled their property investment tax issues quickly. They spoke to Gladfish, and we connected them with a property tax specialist who was able to help them. They had to pay for the trust to be set up, but they’ve structured their property portfolio to make a better income and retain the full benefits of both spouses’ CGT allowances should they decide to sell in the future.

Of course, every property investor’s circumstances are different. That’s why you should always consult a property tax specialist before taking any action. However, I hope that David and Debbie’s story has shown you that there are strategies you can use to reduce your tax liability in property investment.

Contact one of the team today on +44 207 923 6100. We’ll help you review your current portfolio and explain property investment strategies that will maximise your return and minimise your tax liabilities.

Live with passion,

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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