You and your spouse receive income from a jointly owned buy-to-let property. Your spouse pays tax on the income at the basic rate while you pay at the higher rate. How can you improve your joint tax position?
Shifting income
The obvious answer to the question above is to shift the property rental incomewholly or partly to your spouse. In practice this isn’t as simple as it sounds. The main sticking point is that as a married couple chances are you own the properties as “joint tenants” and not as “tenants in common” (different terminology is used in Scotland but the effect is the same). These are legal terms that affect your rights over the property but they can be altered to improve tax efficiency.
Types of joint ownership
As joint tenants you both own rights to the whole property including income derived from it, rather than a specific share of the property and income. By contrast, as tenants in common you each own a specific share of the property, which can be varied to allow for better tax efficiency.
Improving tax efficiency – Step 1
A joint tenancy can be changed to a tenancy in common simply by one owner notifying the other in writing that they are “severing” it, and notifying the Land Registry of this. As a result of the severance you and your spouse will each own 50% of the property as tenants in common. However, alone this won’t affect the tax on rental income. Two further steps are needed. Tip. GOV.UK provides a guide to severing a joint tenancy, including the Land Registry form. Trap. Before severing a joint tenancy you should notify any person who has a charge on the property, e.g. a bank/building society.
Improving tax efficiency – Step 2
Now that you and your partner are tenants in common you can transfer a part of your share of the property, and thus the income produced, to your spouse. The easiest way to do this is by a deed of trust. This should say that you are giving part of your 50% share of the property to your spouse and holding it for them on trust (seeThe next step). So, for example, they might own 95% of the property. However, the tax rules are tricky and without the third step you would still each be taxable on 50% of the income.
Improving tax efficiency – Step 3
To override the 50/50 tax rule you and your spouse must jointly complete aForm 17election and send it to HMRC. The effect of this is that you’ll each be taxed on your share of the income as stated in the deed of trust. Trap. The Form 17 must reach HMRC within 60 days of being signed.
Tip. The change in income allocation applies from the date the Form 17 is signed, it cannot be backdated. The election remains in force until permanent separation, death or a further change in ownership shares. In the latter case the 50:50 tax rule will apply unless another Form 17 is submitted.
Other taxes
Generally, there are no immediate capital gains tax or inheritance tax issues to worry about, but there are potentially longer-term issues that you should consider. In addition, if the property is subject to a large mortgage, a liability to SDLT (or the equivalent taxes in Scotland and Wales) might arise (seeThe next step).
Reduce your joint tax bill with three steps: change ownership of the property from “joint tenants” to “tenants in common”, increase the property ownership share for the person who pays the lowest tax rate and elect to be taxed on income in proportion to ownership.
The next step
Form 17
Joint property ownership
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.