I'm considering a capital raise remortgage on a jointly owned BTL. What are the tax implications (CGT, income tax) if the funds are then used by only one owner for a separate property investment?
Quick Answer
Remortgaging a jointly-owned BTL for one owner's separate investment can complicate tax relief on mortgage interest. Section 24 disallows interest deductions if funds are not used for the joint BTL, affecting income tax. CGT is not incurred by the remortgage.
When funds from a jointly owned buy-to-let (BTL) property are raised via remortgage, and then exclusively used by one of the joint owners for a separate property investment, the primary tax implications revolve around beneficial ownership and the source of the debt. It is crucial to distinguish between the legal ownership of the property, which is typically joint, and the beneficial ownership, which determines how profits and losses are ultimately shared for tax purposes. For residential properties, Capital Gains Tax (CGT) is 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers on profits over the annual exempt amount of £3,000 as of 2026/27. Income tax for landlords on rental income is subject to a 20% tax credit for finance costs, as mortgage interest is no longer deductible since April 2020.
### What are the Income Tax Implications?
If a jointly owned BTL property is remortgaged and the funds are used by one owner for a separate venture, the income tax treatment of the original BTL property's rental income generally remains unchanged. The rental income and associated allowable expenses (excluding mortgage interest) will still be declared by the joint owners in proportion to their beneficial ownership, often 50/50. Section 24 means that mortgage interest is not an allowable deduction, but a 20% tax credit on finance costs is provided. The key point is that the loan itself remains a joint liability, regardless of how the funds are deployed by one owner.
Consider a BTL jointly owned by A and B, generating £1,500 monthly rent with £800 monthly mortgage interest. A capital raise of £100,000 is secured, with the full amount going to A for a separate investment. The rental income of £18,000 annually is still split, say, £9,000 each. The £9,600 annual mortgage interest translates to a £1,920 tax credit (20% of £9,600), which is also split between A and B, usually £960 each. The personal use of the capital by A does not alter B's entitlement to their share of the tax credit on the joint mortgage. This can create an imbalance, where one owner benefits from the capital while both remain liable for the associated interest and benefit from the tax credit.
### What are the Capital Gains Tax (CGT) Implications?
The act of remortgaging itself does not trigger a CGT event, as no sale or disposal of the property has occurred. CGT only becomes relevant upon the disposal of the property. When the jointly owned BTL property is eventually sold, CGT will be calculated on the gain (sale price minus original purchase price and allowable costs) in proportion to the beneficial ownership. The fact that one owner used the remortgage funds for their sole investment does not typically affect how the CGT on the original BTL is calculated or apportioned between the joint owners. The capital gain will be attributed based on the agreed beneficial interest, for example, 50/50, and each owner will utilise their annual exempt amount of £3,000.
For example, if a jointly owned BTL property was purchased for £200,000 and sold for £350,000, yielding a £150,000 gain, each owner would be liable for CGT on £75,000, minus their £3,000 annual exempt amount. The rate would be 18% or 24% depending on their income tax band. The fact that one partner took the remortgage funds would not change this calculation on the original asset. However, the separate property investment made by the one owner using these funds will have its own CGT implications when that property is eventually sold.
### Can beneficial ownership be adjusted?
Yes, joint owners can, in some circumstances, vary their beneficial ownership proportions using a Declaration of Trust. This document would formally state how the property's income and capital gains are to be divided, regardless of legal title. If one owner uses the remortgage funds solely, they might agree to a different beneficial interest split to reflect their increased 'investment' into the portfolio or to compensate the other owner for carrying the debt. Such a change would need to be properly executed, potentially involving legal advice, and HMRC would generally expect the actual distribution of income and capital gains to align with the Declaration of Trust. Any adjustment for tax purposes requires clear documentation and a commercial rationale, especially if it shifts tax liabilities. Without a formal Declaration of Trust, HMRC assumes a 50/50 split for jointly owned properties by unmarried couples, or beneficial ownership aligning with legal ownership for married couples electing to be taxed this way.
### Investor Rule of Thumb
When conducting a capital raise on a jointly owned asset, the liability for the loan and the tax implications for the original property's income and capital gains remain tied to the joint beneficial ownership, regardless of how one partner uses the funds.
### What This Means For You
Most landlords don't lose money because they miss opportunities, they lose money because they misunderstand the tax implications of their actions. Capital raising is a powerful strategy, but the internal agreements between joint owners must be clear and documented. If you want to understand how structuring beneficial ownership can impact your tax position, this is exactly what we analyse inside Property Legacy Education.
Steven's Take
Capital raising from an existing jointly owned BTL to fund a separate investment by one owner is a viable strategy, but it requires careful consideration of the agreement between the joint owners. The key is to separate the property's tax position from the individual's use of the funds. While the remortgage interest will still be a joint liability, providing a 20% tax credit for both owners, the beneficial owner who uses the funds needs to account for their own separate investment's taxes. Crucially, the original property's CGT when sold will be split according to beneficial ownership, unaffected by the remortgage fund's deployment. Clarity and formal documentation, like a Declaration of Trust, are paramount to avoid future disputes or unexpected tax implications, particularly if the beneficial ownership deviates from the legal title.
What You Can Do Next
1. Review your existing BTL property's legal and beneficial ownership documentation: Confirm how the property is currently held and how income and capital gains are distributed, available via your conveyancing solicitor or Land Registry title deeds.
2. Consult a specialist property tax accountant before capital raising: Discuss the proposed use of funds by one owner and obtain advice on how it impacts income tax (Section 24) and potential CGT liabilities, find one via ICAEW or ACCA directories.
3. Consider a Declaration of Trust to formalise beneficial ownership changes: If the use of funds by one owner necessitates a change in profit/loss sharing for the original BTL, instruct a solicitor to draft a formal Declaration of Trust, available through legal firms specialising in property.
4. Document the internal agreement for fund usage: Clearly outline the terms of the capital raise, how funds will be deployed by the individual owner, and any agreements for repayment or adjustment to beneficial interests, for your own records and potential HMRC scrutiny.
5. Understand the tax implications of the *new* separate investment: The owner using the funds must separately account for income tax and CGT on their new property venture, independent of the original joint BTL, referencing HMRC guidance on property income and capital gains.
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