Q: Can I assign the income from my investment property to my spouse so it is taxed at a lower rate?
A: Where only an income stream is transferred and the transferor retains an interest in the capital value of the property generating the income, the income is treated for income tax purposes as the income of the transferor under the settlement legislation of the Income Tax (Trading and Other Income) Act 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 per cent of the income stream effectively, a 50 per cent interest in the capital value of the property must also be transferred.
Capital assets are transferred between spouses at nil gain or loss for capital gains tax purposes.
The deemed consideration, the amount that is treated as being paid for the property irrespective of what was actually paid, is equal to the expenditure on acquiring and improving the property, thus the resultant gain is treated as being exactly zero.
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 private residence relief may be lost inadvertently.
A transferee spouse will only acquire the ownership and occupation history of the transferor where the property is transferred while it is the main residence of both spouses (Taxation of Chargeable Gains Act 1992, s.222(7)).
If the property is not their main residence, the 100 per cent capital gains tax relief, which the transferring spouse would have benefited from if they had sold the property, will not apply on a future disposal by the acquiring spouse.
The final tax charge to consider is stamp duty land tax (SDLT). There is no exemption from SDLT for transfers between spouses, and the tax is chargeable where the acquiring spouse provides consideration for their interest in the property, including assuming liability for debt.
Although not strictly a tax issue, it is of note that a transfer of beneficial ownership of a property does not require a transfer of a legal title.
While a trust arrangement does not need to be written to be effective, a written declaration that is signed and dated can prevent disputes with HM Revenue & Customs over the validity and commencement of the transfer, particularly where income continues to be deposited into a joint bank account.
Ben Chaplin is managing director of Croner Taxwise
