If you and your partner make an income from renting out your jointly owned property, you’ll be expected to pay income tax on the earnings. HMRC will automatically split the tax 50/50. This isn’t always the most tax-efficient, especially if one of you is a higher earner. But did you know that you can split the rental income and significantly reduce your income tax liability?
Regardless of how you and your partner own a property, you can still benefit from splitting the rental income. To do this, however, the property ownership will need to be transferred either through a Declaration of Trust or by transferring the title at the Land Registry. You must also update HMRC.
In this blog, we explore how you and your partner may be able to split rental income and benefit from a reduced tax bill. Keep reading if you want to make the most of these smart tax savings, or contact Spotlight today for professional tax advice.
At Spotlight Accounting, we are a close-knit, friendly team of chartered accountants who are focused on finding the best solutions for our clients. Not only are we experienced accountants, but we also have firsthand experience as landlords. We understand the challenges of managing property alongside handling day-to-day finances, which is why our accountants are keen to take the pressure off.
Does the rental property need to be jointly owned to split the income?
Technically, the rental property does not need to be jointly owned for you and your partner to split the income. But, how you make the most tax-efficient savings all depends on how you structure your arrangement.
If you and your partner own a property together, as joint tenants or tenants in common, either in equal or unequal shares, HMRC’s default position is that you will both have equal rights to the rental income. This is regardless of where the income is paid into and any contributions made by each partner. It also means that you will have equal responsibility for any taxes associated with the rental income. The rental income can be split in accordance with your beneficial ownership but certain documents need to be filed with HMRC.
In a situation where you and your partner do not own a property jointly, you can still split the rental income in accordance with your beneficial ownership. This means that the rental profits can be divided in line with each of your individual contributions or with an agreement between each party. This can be equal or unequal shares regardless of who the legal owner is, but you must both need to agree on the proportions.
How do you adjust the split of rental income with a partner?
To split the income based on the beneficial ownership rather than the legal title, you and your partner will need to submit a declaration to HMRC through an Income Tax form 17 as well as evidence that a legal declaration has been made. This is normally done through a Declaration of Trust.
HMRC will not accept rental income being taxed differently from the legal ownership status until a satisfactory declaration has been received. After each partner has signed the declaration, you will have 60 days to send the form 17.
Preparing a Declaration of Trust
A Declaration of Trust (also known as a Deed of Trust) is a legal document that changes the beneficial interest of a property so you know who owns what. It ensures a smooth and clear journey when purchasing a property with someone – whether that’s a partner, friend or family member.
We would recommend that a solicitor be used to draw up this agreement. Using a solicitor also ensures that each party has a complete understanding of the declaration and can help you navigate the process with ease.
Do you have to submit a Deed of Trust to HMRC?
HMRC will require a copy of the Declaration of Trust as part of the requirements for submitting an Income Tax form 17. It is also important to keep records of your Declaration of Trust in case you need it in the future.
Benefits of splitting rental income with your spouse or civil partner
The main benefit of sharing rental income with your spouse or civil partner is that it can significantly reduce your tax liability by potentially pushing you both into lower tax brackets. This all depends on each person’s overall income and the rental profits you earn from your property portfolio.
For example, if you are a high earner and your partner is not, you may find that your portion of income tax from the rental property is taxed at a higher rate. However, if you split the income into unequal shares, so you receive less than your partner, you can potentially ensure that all or most of the rental income is taxed at the basic rate.
In addition to reducing your tax liability, splitting rental income with your spouse or civil partner can also benefit you by:
- Simplifying estate planning and inheritance
- Creating more financial flexibility
- Fairly splitting the income (if one of you contributes more to the property)
How are you taxed when rental income is split?
So, if you’ve decided to split the rental income with your partner, then you’re probably wondering how each of you will be taxed. Ultimately, it is pretty straightforward. Each person will be taxed on their share.
The amount of tax you will pay will depend on your overall income and deductions.
Income tax
When paying income tax on your rental property, any income received will be taxed in line with each partner’s beneficial interest in the property, where an Income Tax form 17 has been lodged. This means that if your split is 60% and your partner receives 40%, then you will pay income tax on your 60% split, and they will pay income tax on their 40%.
Does Capital Gains Tax affect both spouses?
Yes. Initially, there is no CGT to pay when a beneficial interest in a property is transferred from one spouse to the other. This is due to the transfer being at nil gain nil loss. What this means is that the property is transferred at the amount that the property was originally purchased for rather than the market value on the date the property is being transferred.
While this is great, as the beneficial ownership can be transferred tax-free, it is important to note that any capital gain and potential tax liability on this is transferred at the same time.
Get in touch with Spotlight Accounting property tax accountants
At Spotlight Accounting, we combine professional accounting with personal experience to help married couples and civil partners reap the rewards of splitting rental income.
Transferring an interest in a property between spouses can have significant tax advantages, but it is important that you get it right. Our team of expert property accountants can look at your property portfolio and help ensure that it is operating in the most tax-efficient manner when considering all taxes and potential future liabilities.
If you and your partner are thinking about changing how your property income is split, then contact us today for expert guidance.
Conclusion
Sharing income from property with your spouse can, in some cases, be very beneficial for tax purposes as it can significantly reduce your tax liabilities. It is a straightforward and simple process when you work with professional accountants like Spotlight Accounting. We will make sure to get all of the legal details correct and give the best tax advice for your situation. This way, you know you are making the most informed decision.
