Couples, civil partners and co-habitees jointly owning properties that are given out on rent can save considerably when it comes to the tax component. This can be achieved legally as permitted by the HMRC, provided that criteria are met. Here it is necessary to understand that there is no blanket remedy which will help jointly owned property tax planning with a single option. It differs from case to case, it depends on the amount in consideration and it depends on the relationship. Without specialist Property Accountant advice, it may actually be self defeating, to achieve less tax exposure, because of the complexities and compliance involved. However, it pays to be informed of relevant and applicable property tax management clauses and calculations. Here is a good look at the more important ones you need to be aware of, as a joint owner of property.
Automatic income tax calculation invoked in the case of married couples
If you happen to be joint owners as married couples, HMRC considers both the spouses as equal owners for the purpose of tax. This 50:50 split can cause considerable tax exposure to the couples if one of them happens to be a higher rate tax payer. The maximum or additional rate of tax is calculated as 45% of rental profits. For instance, a couple earning rental profits would entail an automatic 50:50 split which would mean that each of them would have to pay tax at the applicable tax rate for the one half share earned. One could be in a higher tax rate while the other could be in a basic tax rate. This effectively will result in a combined higher tax outgo. On the other hand, if it were possible to re-adjust the split of income in such a way that the major portion of the income goes to the lower tax rate payer, then the combined tax outgo would be considerably lesser. This table will explain it better :
|Equal Split||Unequal Ownership|
|Rental income – £20000||Husband||Wife||Rental income – £20000||Husband||Wife|
|Share of each spouse||@50% = £10000||@50% = £10000||Share of each spouse||@20%= £4000||@80%=£16000|
|Rate of tax||Additional rate @ 45%||Basic rate @ 20%||Rate of tax||Additional rate @ 45%||Basic rate @ 20%|
|Tax paid||£4500||£2000||Tax Paid||£1800||£3200|
This shows how it is possible to reduce tax exposure by going in for a declaration under Form 17 for changing split in income for the purpose of taxes. However, if both partners or co-habitees were to be in the same rate of tax, then this option would be of little or no use.
Form 17 – change of split in income
Form 17 is a declaration of beneficial interests in joint property and this can be used by spouses to reduce the tax component legally. While it is useful, it needs to be processed properly to draw benefits. Some of the points that need to be borne in mind which will require specialist property tax management assistance for smooth processing are
- Spouses need to enter into a formal agreement or deed spelling out clearly that the income will be split unequally.
- The couple should demonstrate that they are ‘tenants in common’ and not ‘joint tenants’.
- The Form 17 declaration needs to be submitted within 60 days of signature of both spouses.
- The property should not be held in equal shares.
- The date of declaration will be considered as the period from which the unequal split is considered for the purpose of tax. This means that it needs to be completed at the earliest.
- The beneficial ownership and the rental income split need to be the same. This means that the rent and benefits from holding the stake in the property will be in the same ration and cannot be different.
Couples need to understand that CGT (Capital Gains Tax) that will arise out of any subsequent sale of the property will be applicable as per the beneficial ownership ratio. A qualified Property Accountant would be best placed to offer sound advice and help in jointly owned property tax planning requirements.