BTL Loan from spouse - allowable expense?
Discussion
My wife is buying a BTL property; I have sufficient savings in an account in my name only, to loan her the full purchase funds. This would be an interest-only loan, at reasonable "BTL market rates" and would be documented with a full audit trail of original funds existing, then being transferred to her, then transferred to solicitor for property purchase. It would be wholly and exclusively for purpose of her purchasing the BTL.
Would this be an allowable expense in the same way as a BTL mortgage from a lender in the market? .... or could this be construed as a form of tax avoidance ?
Would this be an allowable expense in the same way as a BTL mortgage from a lender in the market? .... or could this be construed as a form of tax avoidance ?
matt3001 said:
I thought a married couple was considered to just have joint resources? Not his pot and her pot, so this wouldn't work.
Okay so sticking to the legal/technical aspect of that question - and not the moral aspect which is a completely different conversation :-) - surely that can’t be correct .... interest from accounts in my name go on my tax return , interest from accounts in my wife’s name go on hers – they aren’t pooled or shared? We also get separate tax-free allowances, separate ISA allowances etc, again none of these are pooled/shared I know where you are coming from in relation to a tax point of view.
However, I was thinking more in terms of capital, isn't husband/wife money irrespective of source classed as joint capital, i.e. if everything was ever to get liquidated (divorce) then it would be split down the middle?
As I understand it what you propose is that your wife buys a BTL property, hers is the sole name on the deeds. You will have a loan agreement drafted and signed outlining loan amount and agreed interest/period and she will pay you that interest. Will you take security over the asset, i.e a fixed charge?
I just can't get my head around how that wouldn't be classed as an asset of the couple and not just your wife, making the whole thing fall over.
However, I was thinking more in terms of capital, isn't husband/wife money irrespective of source classed as joint capital, i.e. if everything was ever to get liquidated (divorce) then it would be split down the middle?
As I understand it what you propose is that your wife buys a BTL property, hers is the sole name on the deeds. You will have a loan agreement drafted and signed outlining loan amount and agreed interest/period and she will pay you that interest. Will you take security over the asset, i.e a fixed charge?
I just can't get my head around how that wouldn't be classed as an asset of the couple and not just your wife, making the whole thing fall over.
matt3001 said:
I know where you are coming from in relation to a tax point of view.
As I understand it what you propose is that your wife buys a BTL property, hers is the sole name on the deeds. You will have a loan agreement drafted and signed outlining loan amount and agreed interest/period and she will pay you that interest. Will you take security over the asset, i.e a fixed charge?
Correct as above - I hadn't planned to take security over the asset. In a worst case scenario (eg. divorce) we have a significant amount of equity in main residence so any default on loan would be settled as part of division of other assets I'd expect. As I understand it what you propose is that your wife buys a BTL property, hers is the sole name on the deeds. You will have a loan agreement drafted and signed outlining loan amount and agreed interest/period and she will pay you that interest. Will you take security over the asset, i.e a fixed charge?
matt3001 said:
I just can't get my head around how that wouldn't be classed as an asset of the couple and not just your wife, making the whole thing fall over
Maybe it would be from asset perspective, but even if so, isn't that 'just' a CGT issue rather than anything to do with income tax? keith333 said:
If you're a higher rate taxpayer and your wife isn't, then I'm pretty sure HMRC wouldn't view this arrangement favourably at all. It's a bit like a business owner paying his wife a few quid so they pay 20% tax rather than paying themselves and paying 40% tax.
What you are describing would be perfectly legal. Its good tax planning. As a business owner you xan pay yourself what ever you want. In my absence yesterday, I am a bit late on this one but here is my view.
The rental is viewed by HMRC as a business which can obtain finance wherever it can at the best commercial rates possible. So the issue here is what interest rate will be used for this unsecured loan?
The difficulty is assessing if the rate is comparable with anything available as I doubt any lending of this sort is available.
If the rate charged is reviewed and seen to be excessive then the rental business may be required to limit the amount of tax-deductible interest whereas the OP would always have to show the full amount chargeable on his tax return.
In summary - yes you can do it but ensure you document the loan and the reasons for the interest rate selected.
HTH
David
The rental is viewed by HMRC as a business which can obtain finance wherever it can at the best commercial rates possible. So the issue here is what interest rate will be used for this unsecured loan?
The difficulty is assessing if the rate is comparable with anything available as I doubt any lending of this sort is available.
If the rate charged is reviewed and seen to be excessive then the rental business may be required to limit the amount of tax-deductible interest whereas the OP would always have to show the full amount chargeable on his tax return.
In summary - yes you can do it but ensure you document the loan and the reasons for the interest rate selected.
HTH
David
98elise said:
To the OP, what is the advantage to you? if you charge your wife interest, then you will pay tax on it. Its no different to you just buying the property and recieving the cash without the middle man(woman)
Plenty of advantage they aren't paying a bank interest on the loan the wife is paying him the interest, its a win win and therefore probably not allowed. Sumo69/David, thanks; my intention was to review BTL market rates and use this to set reasonable interest rate – keeping records of course.
98elise; thanks also – the advantage to me is that I can get a higher interest rate on this cash than I can currently; it would be neutral for my wife apart from she would save on a BTL mort application fee.
It wouldn’t work for me to buy the property as (a) I would be taxed at 40% on rental income (and if I used capital to purchase, even worse I would have no mortgage/loan allowable expenses to offset against income); and (b) I simply don’t have the time or inclination to run BTL(s) – whereas my wife does - putting this 'business' in my name would therefore be a misrepresentation (though not sure this would matter or not)
98elise; thanks also – the advantage to me is that I can get a higher interest rate on this cash than I can currently; it would be neutral for my wife apart from she would save on a BTL mort application fee.
It wouldn’t work for me to buy the property as (a) I would be taxed at 40% on rental income (and if I used capital to purchase, even worse I would have no mortgage/loan allowable expenses to offset against income); and (b) I simply don’t have the time or inclination to run BTL(s) – whereas my wife does - putting this 'business' in my name would therefore be a misrepresentation (though not sure this would matter or not)
.... and just to set out my arithmetic logic here (illustrative figures but realistic) :
Assume loan required is £50k, BTL rate in market would be say 5%
Current gross interest on my savings capital is 3% / net is 1.8% (40% tax payer)
If I don't lend to my wife, then I get £1500 gross/ £900 net interest p.a.; my wife pays £2500 interest to lender, which is also allowable expense against rental income (she is 20% tax payer) so effectively saves her £500 in tax
If I do lend to her (at 5%) then I get £2500 gross/£1500 net interest from her, she pays £2500 and gets same tax saving/allowable expense
So I'm £600 better off, my wifes position is neutral (though in reality she saves from BTL appliction fee which can be £500 or more for best rates).
I accept the points above about it feeling 'dodgy' and if it's a win-win then surely it can't be okay, but equally I'm struggling to see what is actually against any rules here, as long as properly documented and on reasonable rates tec (as per sumo69's comment above) and isn't it just tax-efficient rather than tax avoidance. Maybe I need to call HMRC!
Assume loan required is £50k, BTL rate in market would be say 5%
Current gross interest on my savings capital is 3% / net is 1.8% (40% tax payer)
If I don't lend to my wife, then I get £1500 gross/ £900 net interest p.a.; my wife pays £2500 interest to lender, which is also allowable expense against rental income (she is 20% tax payer) so effectively saves her £500 in tax
If I do lend to her (at 5%) then I get £2500 gross/£1500 net interest from her, she pays £2500 and gets same tax saving/allowable expense
So I'm £600 better off, my wifes position is neutral (though in reality she saves from BTL appliction fee which can be £500 or more for best rates).
I accept the points above about it feeling 'dodgy' and if it's a win-win then surely it can't be okay, but equally I'm struggling to see what is actually against any rules here, as long as properly documented and on reasonable rates tec (as per sumo69's comment above) and isn't it just tax-efficient rather than tax avoidance. Maybe I need to call HMRC!
So let me get this straight and I am only dealing with the loan and interest and not any other allowance your wife could claim against the rental income.
50k @ 5% is about £200 per month interest only (no capital repayment)
Lets say your wife has a property worth 100k (50k is her contribution) and she rents it out at £600.
Your scenario.
She can claim your interest payment against the rental income so income is £600 - £200 (interest) = £400 (income). She pays income tax on that so lets say she has no income, basically its all tax free..
If she gives you £200 then you have to pay £80 income tax and she pays £0 tax (Total joint tax is £80).
The other scenario.
You just give her the money to invest. She pays tax on the £600 and gives you £200 per month (because its joint money, no interest to pay for you). She pays £0 tax and the total joint tax is £0 (because its below the income threshold).
I am struggling to understand where you think the tax saving is coming from.
(I also did the tax take at 40% and cant see any advantage either)----
If she is a 40% tax payer then she pays £160 tax and you pay £80 tax in the first scenario.
If she is a 40% tax payer then she pays £240 tax.
Neither of the above produce any tax advantage.
50k @ 5% is about £200 per month interest only (no capital repayment)
Lets say your wife has a property worth 100k (50k is her contribution) and she rents it out at £600.
Your scenario.
She can claim your interest payment against the rental income so income is £600 - £200 (interest) = £400 (income). She pays income tax on that so lets say she has no income, basically its all tax free..
If she gives you £200 then you have to pay £80 income tax and she pays £0 tax (Total joint tax is £80).
The other scenario.
You just give her the money to invest. She pays tax on the £600 and gives you £200 per month (because its joint money, no interest to pay for you). She pays £0 tax and the total joint tax is £0 (because its below the income threshold).
I am struggling to understand where you think the tax saving is coming from.
(I also did the tax take at 40% and cant see any advantage either)----
If she is a 40% tax payer then she pays £160 tax and you pay £80 tax in the first scenario.
If she is a 40% tax payer then she pays £240 tax.
Neither of the above produce any tax advantage.
Thanks for spending the time to work that through...
Your logic is correct, giving my wife the money is another option (she's a 20% taxpayer incidentally - though appreciate this makes no difference to your logic).
But I was comparing the two options of (a) she gets loan from normal BTL lender, vs ( b) she borrows from me - and as per my logic above (b) appears to give £600 net benefit over (a). This isn't generated from tax per se, but comes from me getting 5% interest rather than the 3% interest I'd get from having cash on deposit (in both (a) and (b) my wife would be paying 5% interest so neutral to her).
Your logic is correct, giving my wife the money is another option (she's a 20% taxpayer incidentally - though appreciate this makes no difference to your logic).
But I was comparing the two options of (a) she gets loan from normal BTL lender, vs ( b) she borrows from me - and as per my logic above (b) appears to give £600 net benefit over (a). This isn't generated from tax per se, but comes from me getting 5% interest rather than the 3% interest I'd get from having cash on deposit (in both (a) and (b) my wife would be paying 5% interest so neutral to her).
beedj said:
Thanks for spending the time to work that through...
Your logic is correct, giving my wife the money is another option (she's a 20% taxpayer incidentally - though appreciate this makes no difference to your logic).
But I was comparing the two options of (a) she gets loan from normal BTL lender, vs ( b) she borrows from me - and as per my logic above (b) appears to give £600 net benefit over (a). This isn't generated from tax per se, but comes from me getting 5% interest rather than the 3% interest I'd get from having cash on deposit (in both (a) and (b) my wife would be paying 5% interest so neutral to her).
The reason it apparently works is nothing to do with tax rates - it has to do with interest rates. Your logic is correct, giving my wife the money is another option (she's a 20% taxpayer incidentally - though appreciate this makes no difference to your logic).
But I was comparing the two options of (a) she gets loan from normal BTL lender, vs ( b) she borrows from me - and as per my logic above (b) appears to give £600 net benefit over (a). This isn't generated from tax per se, but comes from me getting 5% interest rather than the 3% interest I'd get from having cash on deposit (in both (a) and (b) my wife would be paying 5% interest so neutral to her).
If she borrows the money independently, she pays 5% interest, you receive 3% - net loss between you of 2%.
If she borrows it from you, she pays 5%, you receive 5%. Net even between you.
Only disadvantage is that you don't have £50k cash available to buy that 911 Turbo you have been lusting after....(or whatever else you want to do that requires a lump of cash). do bear in mind that if you loan it to her, then you haven't got it for something else, jointly or singly. And she might find remortgaging a lot harder or more expensive that mortgaging on purchase.
Also, even I as an accountant would have to check if the arrangement you propose wouldn't be caught and disallowed by the connected party tax rules. On your tax return you would have to declare the source of the interest, and that could give rise to an enquiry on her and your tax returns. You would have to prove and document that the loan was made on a commercial basis. If she had been the 40% tax payer and you the 20% one, then you would have had even more problems with it.
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