When you own a buy to let or investment property and receive rental income, you can save on your income tax bill if the property ownership is split between you and your partner or spouse. However, when it comes to selling your investment property the same ownership split may not optimal from a capital gains tax savings perspective.

Owning an investment property and tax planning as a higher rate tax payer

Marjorie owns a very profitable business and pays 45% income tax. Her husband Colin looks after the kids and has no income.

Marjorie owns a property which is showing a net capital gain of £50,000 and produces a rental profit of £10,000 per year. If she keeps the property in her name she will pay £4,500 income tax on the rental profits.

She transfers the entire property to Colin. Because they are married there is no capital gains tax on the transfer of the property to her husband’s Colin’s name.

Thanks to his personal allowance, Colin pays no income tax on the rental profits, saving the couple £4,500 in this tax year, and with similar savings in future tax years.

Selling an investment property and managing your capital gains tax position

A few years later Marjorie winds up her business because it is not producing much income and the couple decide to sell the rental property.

Colin now works from home and is a higher-rate taxpayer. If Colin sells the property he will pay 28% capital gains tax on the entire £50,000 capital gain, except the first £12,300 CGT exemption which is tax free, resulting in a capital gains tax bill of £10,556.

Colin shouldn’t transfer the entire property back to Marjorie because that would mean his own CGT exemption would be wasted.

He also shouldn’t transfer just half the property to Marjorie. Because she has no income now, all of her basic-rate band is available which means up to £37,700 of capital gains can be taxed at just 18% in her hands.

Colin could keep 24% of the property in his name (£12,300/£50,000) and transfer 76% to Marjorie. Colin will pay no tax on his £12,000 capital gain and Marjorie will pay £4,626 in tax on her gain of £38,000 – an overall tax saving of £5,930.