Married Landlord? You could reduce your tax bill.
In our post on why buy-to-let incomes are dropping, we saw how the staged removal of mortgage interest relief has led to landlords paying more tax.
The example we quoted in that post was of a higher-rate taxpaying landlord who each month receives £1,150 in rent and pays £700 in mortgage interest payments. Before 2017, they would have had a tax bill of £2,160 leaving them a post-tax rental income of £3,240. From April 2020, an increase in tax to £3,840 would leave them with only £1,560 after tax.
Depending on your circumstances, you may be able to cut your tax bill significantly if you are married.
How does it work?
In a nutshell, you transfer all or part of your property or your portfolio to your spouse. You can do this without incurring tax because gifts between spouses are exempt for Capital Gains Tax. You should be aware, however that there may still be Stamp Duty to pay when you effect the transfer.
When you do this, you also split the rental income. So, if you give your spouse half of a property, they get half the income – which is declared on their tax return, not yours.
This is a useful thing to do if, for example, you are a higher or additional rate taxpayer and your spouse is a basic rate taxpayer or pays no tax at all.
Returning to the example above, if you (as a higher rate taxpayer) gifted 100% of the property to your spouse. If he or she was a basic rate taxpayer earning say £28,000 from their employer, they would pay less tax on the income from your rental property.
| Old Rules | 2017/18 | 2018/19 | 2019/20 | 2020/21 | |
| Tax charge at 20% | £ 1,080 | £ 1,500 | £ 1,920 | £ 2,340 | £ 2,760 |
| Tax charge at 40% | £ 2,160 | £ 3,000 | £ 3,840 | £ 4,680 | £ 5,520 |
| Profit after tax due at 20% | £ 4,320 | £ 4,320 | £ 4,320 | £ 4,320 | £ 4,320 |
| Profit after tax due at 40% | £ 3,240 | £ 2,820 | £ 2,400 | £ 1,980 | £ 1,560 |
Your spouse would pay only £1,080 in tax, giving a profit of £4,320 – an increase of £2,760 compared to what you would pay as a higher rate taxpayer from 2020/2021 onwards!
Your saving from 2020/2021 would then be £2,760 for every tax year thereafter, unless the rules are changed again.
Transferring some or all of your property or portfolio to your spouse can also be beneficial if your income only just pushes you into the higher or additional tax band. Say your income is £40,000 per annum, the taxable profit on your property pushes you well into the higher rate tax band. By transferring some or all of that property to your spouse, you can drop back into basic rate tax – and all of your property income will be taxed at the basic rate.
Of course, there are drawbacks to spousal transfers. You really, really have to trust your spouse! If you get divorced, your ex can then walk off with a chunk of your portfolio. But if your relationship is rock solid, the tax savings you can make could be very significant.
But before you jump to a decision, it’s essential to talk to an expert, such as THP accountants. That way you can make proper forecasts and do the correct paperwork to notify HMRC of the proportion of your property you are transferring.
Next topic Strategies for improving Buy-to-Let income
More in this series:
- Making Buy-to-Let More Profitable
- Why Buy-to-Let Incomes are Dropping
- Should I transfer my BTL properties into a limited company?
- Married Landlord? You could reduce your tax bill.
- Strategies for improving Buy-to-Let income
- Personal Buy-to-Let mortgages & re-mortgages – the facts
- Selling your BTL property – things to look out for
- How THP can help you as a Landlord
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The information included on this page should be regarded as general advice only. You should always seek professional advice tailored to your own specific circumstances before taking any action based upon it.
