Help with passing property rental to my wife for tax purposes

Reply to the comment left by Mark Alexander at 21/11/2018 - 08:10
Mark, my accountant has advised me that I can only effectively use a DOT for tax purposes if I change the legal title. Simply drawing up a DOT on a property I own 100% to say I want my wife to have 99% of the income would be caught by the Settlements Legislation (this is apparently clearly stated in HMRC procedural manuals) and the outcome would be that 100% of the income would remain taxable on the sole owner.

I'm obviously been cautious here but I am adamant to understand this. Why is there so much conflicting advice on this? Surely it should be cut and dry, it seems like such a clear and simple way not to have to go through the process of changing the legal title. I certainly wouldn't expect a reputable site like Property118 to be so in contrast to multiple accountants that have advised me the same as above.

Mark, any clarification would be appreciated.

Reply to the comment left by Paul Harsley at 25/11/2018 - 08:50
Hi Paul

Why would you take legal advice from an accountant?

I have asked our Hon. Legal Counsel, Mark Smith, Barrister-At-Law and head of Chambers at Cotswold Barristers to comment.

Meanwhile, please ask your accountants to provide you with a link to the HMRC manual they are referring to and post it here so that Mark Smith has something tangible to respond to.

You cannot use a DoT (or anything else) to transfer an income stream.
You can use a DoT to gift property to a spouse or civil partner. In this case the settlement clawback will not apply to income arising on that gift.

Reply to the comment left by Paul Harsley at 25/11/2018 - 08:50
PS - I’m sure there are very good reasons for the ICEAW prohibiting their members from advising on and drafting DoT’s

Reply to the comment left by Mark Smith (Barrister-At-Law) at 25/11/2018 - 10:29
More widely-
Sale of the beneficial interests in the properties as part of an incorporation by BICT is similarly not affected by settlements clawback.
What the law rightly does not permit is transferring of income streams without the unconditional transferring of the underlying asset producing the income at the same time. See Chapter 5A ITA 2007 added by Sch 25/FA 2009.

Reply to the comment left by Mark Smith (Barrister-At-Law) at 25/11/2018 - 10:58
That is why I have a problem with the way one particular company is marketing their “Hybrid Structure” for landlord tax planning.

The link to the legislation is https://www.legislation.gov.uk/ukpga/2009/10/schedule/25

Reply to the comment left by Mark Alexander at 25/11/2018 - 09:46
This is for both Mark Alexander and Mark Smith, firstly thank you very much for taking the time to reply to lonely old me.

I'll reply to each in turn:
1) Mark A: Why would you take legal advice from an accountant?
I booked a property specific tax consultation (sorry not with Property118) as my situation is on the cusp of Limited Company requirement for future purchases. I appreciate your specific question but I wouldn't of thought to go to anyone else (solicitor) for advice on property other then property specialist accountants. Maybe naivety on my part! I will ask ref the manual and have also directed her to this page.

2) Mark (S): You cannot use a DoT (or anything else) to transfer an income stream.
You can use a DoT to gift property to a spouse or civil partner. In this case the settlement clawback will not apply to income arising on that gift. What the law rightly does not permit is transferring of income streams without the unconditional transferring of the underlying asset producing the income at the same time. See Chapter 5A ITA 2007 added by Sch 25/FA 2009.

So this is a technicality of how the DoT is worded? Does this still require the transfer of legal title? Or is this all purely on the correct wording of the DoT?

I have the consultation this afternoon. Once complete I will look to post a further response with any answers I have. I am extremely keen to understand the details so thank you for posting the legislation. Mark S, if required I will look to book a call. Thank you.

Reply to the comment left by Paul Harsley at 27/11/2018 - 06:30
As an update to this, again thank you for your responses and clarification on the points raised. The consultation was a complete disaster and ultimately the accountant one As incorrect on some basic legislation and I lost confidence in the advice. I have since had a refund after they confirmed they were wrong (SDLT higher rate between spouses Not applying FI). I have learnt a lot and value everything here on property118 and the willingness of Mark and Mark above to engage and respond, thanks again!

Just a quick note regarding mortgages in this situation. It will not apply to you as such, but similar situations where there are more than 3 properties in the portfolio could leave yourself open to falling foul of the new portfolio income assessment calculations. I recently had a situation where a sole owner had given his wife beneficial ownership of 40% of the rental income. He asked us to remortgage a couple of the properties, but because he wasn't (personally) in receipt of the income, lenders were being ruled out because he didn't meet their portfolio income requirements. Fortunately, I did find one particular lender who accepted the AST value, rather than the received rental value and the day was saved. However, the rate was inferior to that he coud have expected to receive had he kept the full rental to himself.

Reply to the comment left by John Constant at 10/12/2018 - 11:12
Hi John

I really don’t understand why or how this would be an issue. Please explain.

As I see it, the remortgage application would be in joint names of husband and wife, so how would that affect the lenders criteria other than positively? The only potential issue I can think of is if the spouse had a poor credit record.