Tax Saving Ideas for Joint Buy-to-Let Owners (May 2006)

Married couples
In recent months, we have run a series of articles on buy-to-let properties and, in particular, on how to reduce the income tax bills on the rental profits received each year. This is the final article in the series (albeit in two parts) - and here we shall come up with a couple o\ tax quirks which, perhaps, put all of the others in the shade!

As the above title indicates, we shall be looking here at investment properties that are owned jointh by two (or more) people. Tax planning opportunities abound for both married couples and for others but the opportunities for each are very different.
We start with husband and wife.

Example. You are a married man with a substantial income. You are a higher rate taxpayer. Your wife isn't.
You own a buy-to-let property. (Or maybe a few.) And naturally enough, you receive all of the rental income. And you don't want to change that in any significant way: vou want to continue to own both the capital in the property and the income from it. What you would like to do, however, is to substantially reduce the annual income tax bill on the rental profits.

Halve your tax bill with 1% property transfer
We now suggest how, broadly, you might be able to achieve this.

Transfer a very small part of the property to your wife - say, 1%. You will need the help of your solicitor to do this. He will put the property into the joint names of both of you, and execute a deed of trust recording the fact that you continue to own practically all of it - namely, you jointly own it in the ratio of 99:1.
Following that, vou will continue to receive (practically) all of the income and, should you ever decide to sell the property, you will receive (practically) all of the proceeds.
You would think that, each year, income tax would be charged in full on the person who receives the income. That is, on vou. But strangely, the tax rules don't work like that. Instead, you are taxed on only one-half of the income!
The tax treatment here is "out of svnch" with reality because oi a special provision in the tax statutes that applies only to married couples:
where a husband and wife hold an asset jointly then,
whether or not it is owned by them in equal shares,
the income from it is taxed upon them equally.
So you pay tax on just one-half of the income. The other halt is treated, for tax purposes, as your wife's income - even though it isn't!

In the "best case scenario" of course, assuming that your wife's personal income tax allowance (currently 0,035) is not absorbed elsewhere, there will be no tax at all to pay on "her half" of the income (unless it exceeds £5,035). Otherwise, she could be liable to pay tax at 22' & whereas you would have paid tax at 40%.

So, whichever way you look at it, there's a substantial tax saving on offer here, year after year.
All we would ask (if you follow our suggestion) is that, because you continue to receive all of the income, you should "volunteer" to pay any small annual tax bill your wife receives. We don't want to be cited in divorce proceedings!

Common law couples
We now look at a rather different scenario. You are not married, but the two of you are living as "common law" husband and wife.
Example. You are the "common law husband" with a substantial income. You are a higher rate taxpayer, your lady partner isn't.
You jointly own a buy-to-let property. Equally. And, naturally enough, you each receive one-halt of I lie income. .And each ot you pay tax accordingly. Or to be more precise, you pay tax at 40% on your half, and your lady partner pays nothing at all on hers because of her £5,035 personal allowance.
You would love to find a way to reduce -or eliminate - the tax bill that is payable each year on your half of the rental profits.
We now suggest how you might be able to achieve this:

You are happv to forgo your share of the annual income from the bu\ -to-let. Provided, of course, that you still remain a 50'- owner of the property so that, if and when it is eventually sold, you receive tine-half of the proceeds.
So you agree to do just that. You agree with vour "better half" that, from now on, she should receive all ol the income from the property. Even though she might think she's entitled to only half ot it!
Nonetheless, the Revenue will tax her on the whole of the rental profits, and you on none of them at all. Which means your 40% tax bill is eliminated. It will be replaced by (at worst) a 22% tax bill for her - or maybe absolutely nothing, depending on the level of the rental profits.

Sounds good. But maybe too good?
To many, what we have just suggested will seem strange. And wrong. Surely, if you own half the property' you are entitled to half of the rent and must pay tax on that half? You might think so. But it isn'l necessarily so.

We had better explain our thinking here.

Why our suggestion works
We start with some comments made by the Revenue on the subject. We quote:

"... the share of any profit or loss arising from a jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division ot profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed."

So it seems that all that is necessary is for the two of you to "agree" a different share. Such as 100:0.
What's more, this Revenue comment is backed up by the tax statutes. Again we quote:

"The person liable for any tax charged (on the rental profits) is the person receiving or entitled to the profits."

Note receiving or entitled. So if you agree between you that all the rental profits are to be received by vour lady partner rather than by you (and she duly receives them), then she will be taxed on them. And you won't.

Simple written agreement between partners a good idea
In summary, all that the two of you have to do is "agree" that the whole of the rental profits are to be "received" by her and not by you. And for the rents then to be duly paid into her bank account.
The happy result of all this is that the tax bills are slashed.
You might think that the agreement between you should be in writing. However, a recent case on the subject (heard in 2004) suggests that even this is not necessary. Nonetheless we would recommend that, in order to make vour case as strong as possible, there would be a simple written agreement showing who is entitled to receive the profit-.
Before moving on to the last part of this article, we should underline one. perhaps surprising, point that arise- from what we have said so far.

A married couple who own a property 50:50 cannot "choose" to have all ot the rents taxed on just one of them. This helpful facility is only available to joint owners who are not married.
Conversely, a married couple who own a property

99:1 - where the rent is, in fact, received in the ratio of 99:1 - can ensure that the rents are taxed on a 50:5(1 basis. This option is not available to those who are not married: the person who receives 991 i of the rents must, in fact, pav tax on 99 Of the profits.
So, how far can the ploy we have just outlined for non-marrieds - where what matters is who "receives" the rent - be stretched?

"Choosing" who pays the tax (if any)
The example we have just given was of a "common law husband and wife", where tax will be saved if just one of the joint owners receives all of the rental profits - the one who pays tax at just 22% or, better still, at 0
But the strategy can work equally well in many other situations. For instance:

two sisters may own a property jointly, in equal shares, which they both regard as a "nest-egg" for their retirement; but
in the meantime, one of them - a 40% taxpayer -doesn't really need the income whilst the other -who doesn't pay tax at all - reallv could do with it.

So it is agreed that the "poorer" sister will now begin to receive all of the income - an agreement that does not in any way jeopardise the "wealthier" sister's entitlement to receive one-half of the capital value of the property in due course. In the meantime, there's no more 40% tax.

The end result is that both sisters are happy. Only the taxman misses out.

Finally, here's another scenario: one which is perhaps much more commonplace than the one we have just described.
Example. You are a man (married or otherwise) with a substantia] income. You are a higher rate taxpayer. Your elderly widowed mother isn't.

You own a buy-to-let property. You pay 40% tax on the rental profits that are generated from this property. You would like your widowed mother to have this income - without, of course, vou giving up your ownership of the property. This boost to her income would be oi great help to her. And the tax would be substantially reduced too.
You know what to do.

Put the property into joint names. In the ratio oi 99:1. (You can live with giving up l%.)
Come to an arrangement with your mother that, from now on, she will receive all oi the rental profits from the property (for example, the tenancy agreement might stipulate that the tenant must pav the rent to her).
And make sure that all of the rents are indeed paid into her bank account, not yours.

Mission accomplished. Extra income to your mother. Plus a significant tax saving.

Conclusion
We are beginning to feel a little uncomfortable about all this. If we look at our very first suggestion, together with the very last, this is what we seem to be proposing.

You have two buy-to-let properties.

Put the first one in the joint names of vou and your wife. In the ratio 99 to you and 1 to her. Your wife will receive practically none of the income, but she will be liable to one half of the tax on it. Charming!
Things are very different when it comes to your beloved mother. Put the second property into the joint names of you and your mother - again in the ratio of 99:1. But this time, arrange things so that the rental profits are no longer received by you to swell the income (and well-being) of the matrimonial home and family. Instead the profits now go in their entirety to the old battleaxe [sorry, your darling mother).

Your poor wife is incandescent!

We imagine that we simply can't avoid being cited in the divorce proceedings now.

Offsetting university costs with buy-to-let
We imagine that readers will already realise where we are going with this one.
Example. You are a family man with a substantial income. You have an 18-year-old daughter who is about to go to university. You are a higher rate taxpayer. She isn't.
You own a buy-to-let property.
What to do?
We probably don't need to spell it out. But we will.
Your daughter will require significant "funding" whilst at university. All out of your highly-taxed income.
Alternatively, you could:

Put'the buy-to-let property into joint names. In the ratio 99:1.
Agree with your daughter - preferably in writing - that she will receive all of the rental profits from the property.
And make sure that all of the rents are indeed paid by the tenant(s) into her bank account, not yours.

That way, she receives the necessary funding herself - direct, and (whollv or largely) tax-free.
You've cut out the middleman - namely you (with your highly-taxed income). And you've cut out the taxman too!
Alan Rook is a chartered accountant and has been writing on tax matters for the past 15 years.

Update on offshore bank accounts
Landmark" victory for HMRC v Barclays
Finance Confidential last visited the subject of offshore bank accounts in September 2005. Margaret Cash warned then that the Revenue was upping the ante against a hit list of 500 suspected tax evaders. This is part of a broader drive to plug tax revenue leaks and raise more cash for stretched Treasury finances.

This week Gordon Brown must have allowed himself a wee smile of satisfaction as the Revenuenotched up its biggest victory yet in their long-running campaign. It is a battle to reclaim tax on interest income from UK holders of non-disclosed offshore bank accounts.

On the receiving end was none other than British banking blue chip, Barclays Bank. Barclays has been forced to disclose client details on thousands of customers with offshore accounts in the Channel Islands and other low-tax offshore jurisdictions.
Reported as a "landmark" decision, the Revenue are cock-a-hoop with the result and believe they could raise up to £1.5bn in unpaid tax. With such a major scalp under its belt thev are now expected to extend their pursuit oi the 36 other banks which have both UK and international operations in what is seen by financial institutions as an industrv-vvide issue.

This victory tor the Revenue follows another favourable decision earlier this year when they won the right to demand customer credit card details from financial institutions. This has helped them source undeclared offshore accounts as thev are often linked to credit cards.

Why offshore centres are a Revenue target
Of course, the Revenue wouldn't be so doggedly determined in this area if they weren't fully aware that the ultimate pay-off would more than reward their efforts. The deposits in offshore accounts tend to be significantly higher on average than their equivalents onshore, with solicitor Jeanette Harwood of Walker Morris telling the FT that the majority averaged balances of between £250,000 and Elm,

It is no surprise then that accounts held by Barclays alone could yield as much as £1.5bn in reclaimed tax. On top of that, they are then in possession of information leading back perhaps to UK residents and business owners which may reap further reward.

On a global basis, recognised offshore tax havens reportedly account for 1.2% of the world's population but 26% oi its wealth. According to the Merrill Lynch Cap Gemini report in 2000, one third of the wealth of the world's high net worth individuals is held offshore. This amounts to some $6trn of which $3trn is in bank deposits and the balance held within offshore companies and trusts.

Of course, it is not just the pursuit of tax evaders either. The whiff of criminal activity has long tainted offshore centres. The International Monetary Fund has estimated between 2%-5% of world economic output is laundered annually through offshore tax-advantaged jurisdictions. But, given today's climate of heightened international tensions, the noose is getting tighter around the offshore centres, as international pressure, particularly from the US and EU, continues to increase.

What to do if you haven't declared
If you have c\n offshore account held personally and haven't declared it to HMRC, the first question to answer is - do you need to?

The key test here is your domicile. Those of us born and living here are considered UK domiciled and resident. As such we are liable to tax on worldwide income. So the answer here is yes you need to.

Those born here but perhaps living overseas for work or lifestyle choice reasons may be considered non-resident, i.e. out of the country for more than hall tin1 tax year. Non-residents can find an offshore account a useful and legitimate service which makes better financial sense than repatriating income into the UK. While non-resident they may not need to declare to HMRC though need to be mindful of the tax regulations applying in their country of residence.

Those born overseas are usually treated as non-domiciled individuals and taxed only on UK-source income and income brought into the country i.e. offshore bank interest that stays offshore is excluded from HMRC's reporting requirement.

Very long stay overseas residents - those in the UK for 17 of the last 20 tax years - need beware lest they eventually be deemed UK domiciled. If your status is at all unclear be sure to seek out professional advice.

It you establish that you should have declared offshore interest income and haven't, what's the best course oi action?
Margaret Cash quotes independent financial adviser, Anna Bowes, who suggests simply coming clean, a view echoed by KPMG's head of tax investigations, Reg Day. Explain your position and be prepared to pay up. It may hurt now but could be more painful later on if the Revenue come knocking. The penalty for non-declaration can be as much as the tax due plus interest plus a penalty which can be as much as 100% of the tax due. However, full cooperation and disclosure can bring substantial reductions in these penalty levels through negotiation with HMRC.

In time, the entire UK banking industry will no doubt be forced to break client confidentiality and open its records to the Revenue's scrutiny and, after the Barclays decision, that day may not be too far off.
Rob Wticknll is Managing Editor of Finance Confidential