A married couple have asked for a meeting to discuss their jointly owned property portfolio. What can you suggest to help them save income tax, and how could their trading company be used to buy a new home?


Your clients are in their early 60s. The husband runs a successful trading company whilst his wife has just retired so her income has dropped significantly, making her a basic rate taxpayer. Her pension is approximately £13,000 per annum.

The couple have acquired four residential buy- to-let properties over the years, all of which are jointly owned and have mortgages outstanding on them. The total annual rental income is £30,000 and total mortgage interest is £10,000. Net rental income, excluding minor repairs, is therefore £20,000 per year in cash terms. Now that the wife has retired, they want to know if the current structure could be improved.

Current position

The properties are jointly owned so your clients will be assessed to half of the income each. As the husband is a higher rate taxpayer, he will suffer a restriction for his share of the mortgage interest. The first tax year you will need to consider is 2020/21. From April 2020, 0% of the interest will be deductible in calculating the rental profit, and instead a tax credit at 20% of the interest will be available.

Example. The husband will be assessed on £15,000 of income (50% of the total £30,000) and pay tax at 40% = £6,000. He will then receive credit for his share of the £5,000 mortgage interest paid, but only at the basic rate of 20% = £1,000. Net tax payable by the husband will be £5,000. Prior to the restriction of relief financing costs this would have been £4,000, being a straight 40% of his share of the £10,000 net profit. The wife will also be assessed on £15,000 of income, but with tax payable at 20% = £3,000. She will then receive credit for her share of the £5,000 mortgage interest paid at the basic rate of 20% = £1,000. Net tax payable by the wife will be £2,000, which is the same as would have been due under the old rules.

You therefore advise your clients that if the properties were owned solely by the wife, tax savings could be achieved, not only because of the lower tax rate but also because the mortgage interest restriction wouldn’t apply.

Pro advice. As the properties are mortgaged, your clients should contact the mortgage provider to ensure they will not be in breach of their mortgage conditions by moving the ownership of the properties into the wife’s sole name.

The bank has insisted that the husband needs to remain on the mortgage due to the drop in the wife’s income and be a joint owner, although not necessarily with an interest of 50%. You advise the couple to hold the properties in the proportions 90% to the wife and 10% to the husband.

Joint tenants or tenants in common?

Before your clients can change the ownership proportions of the properties, it will first be necessary to determine whether they are owned as joint tenants or as tenants in common.

Holding property as joint tenants will mean your clients jointly own 100% of the whole of each property, and the share of each co-owner will automatically pass to the survivor on the first death. Holding property as tenants in common will mean each spouse owns a separate and identifiable share of each property, which they are free to leave in their will to whichever beneficiary they wish.

Pro advice. It is only possible to change the ownership proportions if the properties are owned as tenants in common.

If your clients are unsure of the precise ownership details, check the Land Registry title document. If it contains the following wording, the property will probably be held as tenants in common: “No disposition by a sole proprietor of the registered estate (except a trust corporation) under which capital money arises is to be registered unless authorised by an order of the court” . Having checked the document, you are satisfied that your clients hold all the properties as tenants in common. This makes enacting the planning more straightforward.

Pro advice. If the holdings were as joint tenants, your clients would first have to sever the joint tenancy by completing Land Registry Form SEV.

Making the change

In order to change the ownership proportions of the properties it is not necessary to register the change at the Land Registry. It is possible to document the change in beneficial ownership using a declaration of trust, whilst leaving the legal title unchanged.

Pro advice. A declaration of trust is a formal document that sets out the actual beneficial ownership of a property. It states that the legal owners noted at the Land Registry hold the property on trust as trustees for the beneficial owners in the set proportions.

Once your clients have entered into a declaration of trust and stipulated the 90/10 ownership split, there is one more hurdle they need to overcome in order to be taxed in accordance with the ownership proportions. Under S.836 Income Tax Act 2007 (ITA) , a married couple who are living together are deemed for income tax purposes as being beneficially entitled to income from jointly owned property in equal proportions, regardless of how they actually own the property.

To override this default position, an election under s.837 ITA must be made. This is done by submitting HMRC’s Form 17.

Inheritance tax bonus

A potential bonus for your clients owning the properties as tenants in common is the valuation for inheritance tax (IHT) purposes. According to the Valuation Office Agency’s technical manual relating to IHT, a discount to the pro rata valuation of the property in the region of 10-15% is often considered appropriate due to the difficulty in selling a jointly owned share of a property.

Example. A property worth £300,000 would have a pro rata half share worth £150,000. However, after applying a discount of 15% (£22,500), it would have an IHT value of only £127,500.

Pro advice. The discount will depend on the size of the share held in the property, who the other co-owner is, and whether the co-owner has the right to occupy the property or not. A discount will only be appropriate where the co-owners are not married or civil partners, as the related property rules of valuation will apply to aggregate the share of each co-owner.

Whilst no discount will be available for your clients on the death of the first spouse, if their share of the property was left to someone other than the survivor, say to a child, a discount will apply on the death of the second spouse.

Buying a home

It could be possible to use this strategy to use funds locked in the trading company to help buy a new home. Ordinarily if your clients’ company were to provide them with living accommodation, a benefit in kind would arise. However, if your clients were to jointly own the living accommodation with the company, it is possible, with careful drafting of the documentation, to escape the benefit in kind rules. Providing the property is owned as tenants in common with the company, your clients’ right to use the accommodation should not be treated as being provided by reason of their employment/directorship with the company, but rather due to their legal position as tenants in common.

Pro advice. HMRC could challenge this planning. However, it acknowledges that the strength of its case will depend on the exact facts in EIM11414.

Advise your clients that they can vary the proportion of income by holding the properties as tenants in common and making a declaration to HMRC. They could potentially use funds in the company to buy a new home using this arrangement with the company as a joint owner, avoiding a benefit in kind charge.

The next step

HMRC guidance – EIM11414
Form 17

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.