Can I give my girlfriend income from my rental property?

My partner and I are unmarried but have two young children together. We own the house we currently live in jointly, but each of us still owns our previous properties from before we met, which are both rented out. 

There is no mortgage on the rental property I own, but my partner’s property still has a relatively small mortgage. My partner earns a lot less than me and receives £6,000 a year gross from her rental property. She has much lower pensions savings than I do.

Is there a way I can transfer ownership of my rental property to my partner to allow her to put the rental income into pensions savings? Or is there a better way of achieving the same objective? 

Phineas Hirsch, senior associate at law firm Withers, says gifting your rental property, if not mortgaged, would not give rise to stamp duty land tax, the property transaction tax in England and Wales. However, because you and your partner are not married, gifting it to your partner will be subject to capital gains tax (CGT) at a rate of 28 per cent on any gains.

In this case, assuming you actually lived in the rental property previously, the £90,000 gains would be reduced to reflect the number of years during which it was your main home. 

You are also correct in assuming that even if you sold the property at below the market rate to your partner, it would still be deemed to have been sold at the market rate and would not help reduce the amount of CGT payable.

If you want rent from your previous property to be added to your partner’s pension without transferring the property, you could gift your partner the income as it arises (and she could contribute it to her pension) or you could make contributions yourself into her pension. Your partner is limited in the total amount which can be contributed to her pension by what she earns from employment.

The annual allowance for pension contributions without a tax charge has recently been increased from £40,000 to £60,000. The threshold at which this allowance begins to be reduced for high earners has also been moved from £240,000 to £260,000. Depending on your new income levels, you may be able to make further contributions to your own pension annually, if you wish.

If your non-rent income is sufficient to cover your living expenses without the need for you to dip into savings, gifts of your rental income could be made under the normal expenditure out of the IHT exemption on gifts from excess income — so no IHT on these sums in the event of your death within seven years.

Contributing the rental income into your partner’s pension would mean that you would be paying income tax on the rent at your higher marginal tax rate, but she will be getting the benefit of the pension income tax relief, so you would want to run those figures to see which option is more tax efficient.

Purely from a tax perspective, marriage or civil partnership might be worth considering. Apart from any gifts between spouses passing free of tax (CGT or IHT), a marriage or civil partnership certificate would also allow for more effective estate planning, such as CGT and IHT benefits for you, your partner and your children, given that the value of your estate is already likely to be over the current IHT exemption threshold (£325,000). 

If we leave farm to our son, could it be challenged?

My son works on our farm, which has been in my family for generations, and I would like to leave it to him to ensure the business continues. Could my other children, neither of whom ever showed any interest in farming, challenge his inheritance?

Emily Robertson, an associate at Burgess Mee Family Law, says wills are not entirely binding in England and Wales. Historically, if you wanted to leave everything to the cats’ home you could. However, this changed significantly following the Inheritance (Provision for Family and Dependants) Act 1975.

The circumstances you mention are remarkably common within farming families: one child remains working on the farm, while the other children choose to leave and pursue their own careers. Farming is a tough profession, with long hours and sometimes offering little financial reward. It is understandable that you would want your son to be recompensed for the work he has undertaken. Furthermore, if your farm has been in the family for generations, you may want it to remain whole and not sold to developers. 

However, your other children can make a claim under the IPFDA if you are domiciled in England and Wales and they feel aggrieved by your will. The court will assess whether your will makes reasonable financial provision for them and will only follow your wishes if it feels it is right to do so. Therefore, there is a possibility that the court may view it as reasonable to divide the farm among your children. 

Whether your other children could challenge your son’s inheritance will largely depend on the value of your estate. For example, if you have valuable assets other than the farm, they could be distributed to your other children. However, it is often the case that farming land is by far the most valuable asset. 

The court will take several factors into account when deciding if your other children should inherit some of the farm. It will pay particular attention to the financial resources and needs of all parties involved. It will also consider any obligations you had to your children, any mental or physical disability they may have, and any other matters it considers relevant. However, the court has said that claims from able-bodied adult children should be met with circumspection. 

The best way to avoid disputes after your death is to plan during your lifetime. You should consult professionals as early as possible. They may be able to put structures in place using insurance policies, lifetime gifts and pensions to ensure that your children are equally provided for.

Once you have spoken to your advisers, you could speak to your children to avoid any surprises. You may then be able to resolve any grievances during your lifetime rather than your children having to go through an inevitably costly IPFDA claim. 

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to yourquestions@ft.com.