Income tax issues with ownership of rental properties
The reality is that many married couples are liable to very different rates of income tax. It is not uncommon to have one who is a 40% payer while the other is liable only at 20% or has no liability at all. Therefore you might think that there would be some mileage in arranging property affairs to take advantage of this.
It is of course conceivable that the person with the higher level of income could be a 50% payer but most people in this position would and should already be arranging their tax affairs appropriately. Where one spouse is just into the 40% band, perhaps these issues would not have been addressed.
In a joint tenancy we said previously that the interests in the property are indivisible. Any profits from renting would be shared fifty-fifty which could be distinctly disadvantageous if there were a significant disparity between the highest marginal rates of the individual owners.
Married couples owning rental property as tenants in common will normally be assumed by HMRC as sharing their profits (or losses) fifty-fifty even if they actually own the property in different proportions. If the ownership percentages are in reality different, the split can be applied to the apportionment of income between the two, but that split must reflect each spouse’s share. A formal election form needs to be completed in these circumstances.
Without an election, if one spouse who wholly owns a property transfers a very small share of a per cent or so to the other, HMRC would make a fifty-fifty split automatically. This would save the couple jointly a significant amount by moving half the income from perhaps the donor spouse’s 40 or 50% tax band to the recipient’s 20 or even 0% tax band.
People who are not married or in a civil partnership may own property as tenants-in-common in any respective proportion such as seventy-five twenty-five, but may split the rental income in a different way they have agreed between them, preferably in writing, if they have a disparity in their particular tax rates. Of course they may do this without regard to income tax, but the point is that they have considerable flexibility. For capital gains tax purposes, gains will follow the underlying beneficial ownership as outlined.
You will see that it is possible to arrange your affairs in order to reduce the tax burden on a common sense way and without resorting to any scheme HMRC might not like. This does not mean that it is necessarily straightforward to do so as issues outlined here and in the previous article have to be considered carefully. You should seek professional advice before taking action.