Selling PPR to husband-to-be to reduce tax bills

[ok so]

Hi, I own my PPR. I purchased it for 53k and its now worth 300k approx. Next year I will be getting married and we have a deposit down for a new house which we will move into. My present mortgage on my PPR is only 10k. As my existing PPR is in a great rental location we would like to hold onto it as an investment property. The problem with this is that I will only be able to offset the small amt of mortgage interest I am paying against rental income and if we do sell it in the near future I will incur capital gains tax. I realise it will be calculated as fraction of the time the house was rented but given the capital appreciation of the house to date I may be better off selling now so as not to incur any capital gains tax.

If i sold my ppr to my husband-to-be at a fair market price (say 300k) he would then be able to rent it as an investment property and be able to offset far more mortgage interest against rental income and if he(we) did decide to sell it in a few years the capital gains tax would undoubtadly be much smaller than what I would pay if I held onto it and then sold it at the same time. I do realise he would have to pay stamp duty but surely the chances are that we would pay less tax overall and I assume this is not illegal. Thanks for any advice offered,
Ali

 

[ClubMan]

If i sold my ppr to my husband-to-be at a fair market price (say 300k) he would then be able to rent it as an investment property and be able to offset far more mortgage interest against rental income

Even if this is possible does it make sense? Have you crunched the numbers to establish that your husband to be incurring the expense of mortgage repayments just to offset interest costs against rental income will be more cost efficient than just renting it out as is?

but surely the chances are that we would pay less tax overall

Have you crunched the numbers? If so post them here.

 

[ARCH]

OK so, from a tax viewv point your suggestion makes perfect sense and there is nothing illegal. The cost you will incur include legal and stampduty so you will need to crunch the numbers.

 

[nt00deep]

CGT: I don't see any saving here. Beyond the point where it is rented out, the CGT liability will be the same either way.

You and your partner will incur transaction costs.

If you are planning to use the case proceeds to reduce mortgage you will need for your new home, then there is no additional borrowing between the two of you apart from a portion of overall loan possibly being charged at investment rates rather than PPR rates.

Quoting what you expect to be the transaction costs and quoting expected rental income will help in getting specific advice.

 

[ClubMan]

CGT: I don't see any saving here. Beyond the point where it is rented out, the CGT liability will be the same either way.

Are you sure? If the original poster holds the property and rents it out then when it comes to selling it on some portion (related to the length of time that it was rented versus a PPR) will be assessable for CGT. By selling now she avails of the PPR CGT exemption. Her husband acquires the property at a new base price and any eventual further resale gain is fully assessable for CGT at 20%. It's possible that this could lead to a different CGT liability isn't it?

I'd still like to see representative numbers crunched though...

 

[nt00deep]

It's possible that this could lead to a different CGT liability isn't it?

Maybe, but this was the background to what I had in my head ...

If selling price now is 300, and husband disposes later at a value later of 300 + x, there is no liability now for her on the 300 and a liability later for the husband of 20% of x (excluding annual exemption).

If she holds now and it ceases to be her PPR, and later sold for 300 + x, then her liability would be 20% of x assuming calculation to determine what portion of profit was made while not her PPR, works out at x. I know it is not based on apparent market value at the time of the switch from PPR, but it should not be a million miles off.

 

[ClubMan]

If she holds now and it ceases to be her PPR, and later sold for 300 + x, then her liability would be 20% of x

This assumption is incorrect. The liability would not be 20% of x but rather 20% of some portion of ((300 + x) - original purchase price) (and the usual CGT allowances etc.). The assessable portion would be ((number of years rented out - 1) / (number of years owned in total)).

 

[extopia]

On point one, as outlined by Clubman, there is no sense in your husband-to-be borrowing money to buy your house in order to offset interest against rental income (because the interest paid negates the saving).

On point two (future CGT liability), I can see what you're trying to do, but are you sure that Revenue would consider this a genuine sale as legally it more or less comes back into your possession once you get married.

Who's going to pay for the new house anyways?

 

[ClubMan]

On point two (future CGT liability), I can see what you're trying to do, but are you sure that Revenue would consider this a genuine sale as legally it more or less comes back into your possession once you get married.

True - even if the transaction is technically legitimate it could still fall foul of Revenue's anti-avoidance rules which can apply to transactions which are solely or mainly structured purely to avoid tax. As ever when it comes to anything but the most straightforward of tax issues it probably merits getting independent, professional advice before making any decision on the basis of incorrect or incomplete information or understanding.

 

[nt00deep]

Clubman

The liability would not be 20% of x but rather 20% of some portion of ((300 + x) - original purchase price) (and the usual CGT allowances etc.). The assessable portion would be ((number of years rented out - 1) / (number of years owned in total)).

Point taken. I was not aware of the free year (-1 in your calc).

 

[ok so]

Thanks for all the advice guys. I did seek professional advice and the accountant I consulted advised me of something that I am not convinced is true. The accountant said that if I re-mortgage my house prior to converting it to an investment property (say I re-mortgage it for 200k) that I could then offset the interest paid on this 200k against rental income. I have my doubts as to whether this is correct. I thought that I could only offset the interest paid on the loan (mortgage) that was used to purchase the house (or loans got to renovate the house). Any thoughts??
And when I do have an hour or two I do intend to "crunch the numbers". I'll post them here, Thanks again

 

[ClubMan]

The accountant said that if I re-mortgage my house prior to converting it to a PPR

You mean before converting it to a rental property?

(say I re-mortgage it for 200k) that I could then offset the interest paid on this 200k against rental income.

This is incorrect. It's what you do with the money and not what property it's secured on that matters. Unless you were using the additional loan amount to purchase or renovate an investment property you cannot offset interest against rental income.

And when I do have an hour or two I do intend to "crunch the numbers". I'll post them here, Thanks again

Good idea. Look forward to seeing them.

 

[z107]

I think this sounds like a great idea.

How about just selling the property, banking the money, and then buying a different property after you get married?

This won't look as suspicious as selling the house to your potential husband. If you were a gambling person, you could even wait a couple of years to see if the bubble bursts, and buy two!

 

[ubiquitous]

I did seek professional advice and the accountant I consulted advised me of something that I am not convinced is true. The accountant said that if I re-mortgage my house prior to converting it to an investment property (say I re-mortgage it for 200k) that I could then offset the interest paid on this 200k against rental income. I have my doubts as to whether this is correct.

Do you mind me asking what sort of accountant gave you this "advice"? Did you pay them a fee for this "advice"? Are they accredited to a professional body? Have they professional indemnity insurance?

 

[ok so]

I havent paid any money yet. I havent used an accountant before and this is not someone I know. I was pretty sure that the accountant was wrong, turns out I knew more than he did!!