Can I Add My Mother to My Mortgage to Reduce Tax?
Question I have a property that I live in but also rent out rooms to lodgers. My mother has invested a lot of money in helping me to modernise the property and in return I would like to add her name to the deeds. I will continue paying the mortgage in my name. My mother already has her own mortgaged property with my father that she lives in and would not be moving into this property.
Another reason for wanting joint ownership is for tax purposes as I am currently paying 40% tax on all my lodger earnings, whereas my mother doesn't work and can take advantage of some of those earnings on a lower tax band.
Could someone please advise me:
1) Whether it is possible for me to add her name to the deeds without incurring tax?
2) Do I need to state the percentage ownership that I am gifting her for tax purposes when they calculate the earnings?
Arthur Weller Replies
Firstly, if you are paying 40% income tax on all your lodger earnings, you should look into whether 'rent-a-room' relief is relevant to you.
Secondly, if the property is worth more now than your original acquisition cost + the capital expenditure you have incurred since acquisition then transferring part of the property to your mother will create a capital gain. If the amount of this gain is less than your capital gains tax (CGT) annual exemption (AE) (2010/11: £10,100) then you will have no CGT to pay but if it is more than the AE then you will have to pay CGT at 28% on the amount in excess of the AE.
Thirdly, let us assume that you transfer part ownership of the house to your mother, for arguments sake, let's say 50:50. After having done this, you can draw up a written agreement between the two of you that she is entitled to more of the rental income than 50%. E.g. you could agree that she is entitled to 90% of the rental income and you 10%, if you so wanted. The result will be that she will be taxed on her 90% and you only on your 10%. (Page PIM1030 on the HMRC manuals: http://www.hmrc.gov.uk/manuals/pimmanual/pim1030.htm)
However you need to watch the fact that only you are responsible for, and paying, the mortgage so only you can claim the mortgage interest payments as an allowable expense to offset against the rental income.
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