Can I assign the income from my investment property to my spouse so it is taxed at a lower rate?
Due to the abundance of legislation that applies to land transactions and gifts, various tax implications are of concern on the transfer of beneficial ownership.
Where only an income stream is transferred. The transferor retains an interest in the capital value of the property generating the income. The income is treated for income tax purposes of the income of the transferor under the settlement legislation at ITTOIA 2005 s.624.
To effect a transfer of the income stream and achieve the client’s objective. The transferor must also transfer a proportionate capital interest. To transfer 50% of the income stream effectively. A 50% interest in the capital value of the property also must be transferred.
Capital Gain on Transfer of Assets
Capital assets are transferred between spouses at nil gain or loss for capital gains tax purposes. The deemed consideration is so much. It would secure a net gain of £0 after accounting for enhancement expenditure, costs to transfer, etc. There are exceptions to this rule where the spouses are not living together. So do not assume tax neutrality will apply.
Take additional care where the property in question was previously the main residence of the transferring spouse. As the private residence relief may be inadvertently lost. A transferee spouse will only acquire the ownership and occupation history of the transferor where the property is transferred whilst it is the main residence of both spouses (TCGA 1992, s.222(7)). If the property is not their main residence. Again that would have been 100% relieved in the hands of the transferring spouse will come into charge on a future disposal by the acquiring spouse.
The final tax charge to consider is Stamp duty on transfer of property to a limited company. There is no exemption from SDLT for transfers between spouses. SDLT is chargeable where the acquiring spouse provides consideration for their interest in the property, including assuming liability for the debt.
Although not technically a tax issue. It is of note that when you transfer property to a company it does not require a conveyance of legal title. Although a trust arrangement does not need to be written to be effective, a written declaration that is signed and dated can prevent disputes with HMRC over the validity and commencement of the transfer, particularly where income continues to be deposited into a joint bank account.