Buy To Let - Who gets the income?

[PurpleFlower1983]

Hi everyone,

This is probably a really stupid question and I’m sure we need to speak to a financial advisor but if my husband and I buy a rental property (50% cash from his inheritance) 50% buy to let mortgage in my name who gets the rental income? We would like this to go to my DH as he is currently self employed and the rental from this for me would take me over the tax threshold for child benefit etc. (Current earnings around £47000). He works in an industry that will take a long time to recover so for short term has no earnings.

Thanks

I’d form a Ltd company say Purple Flower Homes Ltd.
Have the income go to the company account. Pay all expenses from company account. Then only pay 19% corporate taxes on profits.

You and DH are directors of company and you pay yourselves in dividends from the profits minus tax minus any money you leave in business, say to buy another buy to let. This way you can pay yourself to stay below income tax threshold for child benefit etc.

Yes, talk to financial advisor about how to do this. It will save you money and lower your tax bill on the rental.

Or do we do the split based on the share owned each?

@PlanDeRaccordement Thank you! I will definitely seek some advice!

The main issue with buying through a company is obtaining the funding - speak to your broker about this as well.

Well since 100% of startup money is from DH inheritance, he could own 100% of shares. The mortgage would ideally be to company, not you. Then company pays mortgage as an expense out of rental income.

He can also be sole director, or you both be directors. So of course, he’d get higher dividends than you as it’s his inheritance that was the start up investment.

But talk to financial advisor as I only know this can be done, but not how to do it.

In relation to your initial question.
www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030
Scroll down a bit and you will find...

However, where the joint owners are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless:

• both entitlement to the income and the property are in unequal shares, and

• both spouses, or civil partners, must inform HMRC that their share of profits and losses is to match the share each holds in the property.

@PlanDeRaccordement

Well since 100% of startup money is from DH inheritance, he could own 100% of shares. The mortgage would ideally be to company, not you. Then company pays mortgage as an expense out of rental income.

He can also be sole director, or you both be directors. So of course, he’d get higher dividends than you as it’s his inheritance that was the start up investment.

But talk to financial advisor as I only know this can be done, but not how to do it.

It definitely can be done, and can be sensible for tax purposes, but lenders aren't keen on lending to new companies with no financial statements, and often charge a higher rate of interest if you can find someone to lend to you. So not as simple as just "put it through a company".

My understanding is thst If the house is jointly owned, then you would both be liable for tax at appropriate rate.

So dh is higher rate tax payer. He has to add half of rental income to overall income and pays 40% on it.

I pay basic rate on my half of the income.

If it’s 50% mortgage, you’ll also need to add the other costs, insurance, contingency, boiler and plumbing insurance, agent fees, DPS, Electricals and Gas inspection fees, redecoration costs between tenants etc. With one property there won’t be an awful lot of money left.

So as my DH is currently essentially unemployed would he still be entitled to his personal tax free entitlement and I would pay 20% on my share so long as it didn’t take me into the 40% bracket?

@FAQs

If it’s 50% mortgage, you’ll also need to add the other costs, insurance, contingency, boiler and plumbing insurance, agent fees, DPS, Electricals and Gas inspection fees, redecoration costs between tenants etc. With one property there won’t be an awful lot of money left.

I know there won’t be much left. It’s more somewhere to put the money. I already own another rental property outright but have never done Buy to Let before.

If he has no earnings right now why not keep some of his inheritance for living expenses? Sorry, not the point of your question but this was my first thought.

@MoveOnTheCards

If he has no earnings right now why not keep some of his inheritance for living expenses? Sorry, not the point of your question but this was my first thought.

His inheritance was a six figure sum, the investment here would only be around £40k.

Thanks for clarifying PurpleFlower. In theory then he could just use more and buy outright?

I’m not a financial advisor, or anything close!

Just buy it as tenants in common with him owning 98% and you 2%. Then he gets 98% of the income. The mortgage can still be 50/50.

@Chasingsquirrels

In relation to your initial question. www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030 Scroll down a bit and you will find...

However, where the joint owners are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless:

• both entitlement to the income and the property are in unequal shares, and

• both spouses, or civil partners, must inform HMRC that their share of profits and losses is to match the share each holds in the property.

Did you see my earlier post? As a married couple for it to be treated as anything other than 50/50 it needs to be owned unequally AND you need to both notify HMRC of this.

@MoveOnTheCards

Thanks for clarifying PurpleFlower. In theory then he could just use more and buy outright?

I’m not a financial advisor, or anything close!

This is another possibility too! We will have to look into things more. It’s by no means a given but we live in Yorkshire and property is fairly cheap with reasonable returns so we were looking at the best place to invest with relatively low risk. We want to keep a large chunk back due to my OH’s job prospects at the moment.

As a married couple for it to be treated as anything other than 50/50 it needs to be owned unequally AND you need to both notify HMRC of this.

Yes, but a Ltd Company is established as a type of partnership and one of the exceptions to the 50/50 rule:

“If there is a partnership, the letting will be part of a separate rental business and it will not be pooled with profits or losses from properties held by the partners individually.”

“Husbands and wives or civil partners living together should generally be treated as entitled in equal shares to income from jointly held property. See: ICTA88/S282A for years up to 2006-07, and
ITA07/S836 for 2007-08 onwards. However, this rule will not apply in any of the following instances:...
there is actually a partnership; ICTA88/S282A (4)(b), ITA07/S836 Exception C. In this case the income is divided according to the terms of the partnership agreement,

The partnership agreement would be one of the business documents filed with the companies house when the Ltd Company is established.

Any income is given in dividends and goes by shares owned by shareholders. And if the husband owns 100% of the shares because it is all his money starting the company, then he gets 100% the dividends. He could also draw a salary to claim as earned income as well.

Yes, I agree that getting a mortgage might be tricky, but with 50% or more as a deposit and a good market rent analysis showing the returns, a good broker can find you one. It would be worth the slightly higher interest imho because of how much you can deduct from taxable business income.

quotes are from helpful HMRC link that @Chasingsquirrels* posted.

A limited company is NOT a partnership, it is a totally separate legal entity (and I completely agree with your suggestion about whether looking at putting it in a company, although it does have costs and funding maybe an issue).

You can set up a Ltd company with whatever shares you choose. You can pay salary with whatever amount you decide.

Ie. You can set it up 50/50 shares. He loans the amount as a directors loan - so the company owes him interest also. Then pay him salary up to taxable amount and then pay yourself equal dividends up to dividends amount.

@PurpleFlower1983

Or do we do the split based on the share owned each?

he's buying 50% and you are buying 50% - surely you split it 50/50?

@PlanDeRaccordement

Well since 100% of startup money is from DH inheritance, he could own 100% of shares. The mortgage would ideally be to company, not you. Then company pays mortgage as an expense out of rental income.

He can also be sole director, or you both be directors. So of course, he’d get higher dividends than you as it’s his inheritance that was the start up investment.

But talk to financial advisor as I only know this can be done, but not how to do it.

doesnt the op say they are buying 50% from his inheritance, and 50% with her mortgage?

@Chasingsquirrels

A limited company is NOT a partnership, it is a totally separate legal entity (and I completely agree with your suggestion about whether looking at putting it in a company, although it does have costs and funding maybe an issue).

Sorry I was not clear. A Ltd Company is not a partnership by itself, but it can be part of a partnership (LLP): “In a partnership, you and your partner (or partners) personally share responsibility for your business. This includes:

any losses your business makes
bills for things you buy for your business, like stock or equipment
Partners share the business’s profits, and each partner pays tax on their share.

A partner does not have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.”

www.gov.uk/set-up-business-partnership

@VinterKvinna
doesnt the op say they are buying 50% from his inheritance, and 50% with her mortgage?

Yes. But it is framed as what she thinks they might do. I think good idea is to use 100% of inheritance to start Ltd Company, then the company gets any needed mortgage for a buy to let. They have enough money to actually buy a cheaper property outright, with no mortgage with the inheritance money. That’s probably how I’d start out. But it is possible for company to get mortgage in its own name and the OP takes no financial risk at all. She is not on any mortgage paperwork.