7 things you need to know about income tax for spouses and civil partners who own joint assets
If you rent out a residential property that you jointly own with a spouse or civil partner, you are required by law to pay tax on any taxable profit you receive.
A recent campaign launched by HM Revenue and Customs (HMRC), called the 'Let Property Campaign', is giving residential landlords the opportunity to voluntarily disclose any rental income you have received but not yet declared.
This all sounds quite straight forward, you might be thinking.
Well yes in theory, except as a property and tax specialist I regularly receive calls from landlords who jointly own a property with a spouse or civil partner and are not clear on the rules surrounding joint ownership.
What do you need to know?
- Joint ownership refers to 'beneficial' not 'legal' joint ownership.
- Tax on rental income is determined by beneficial ownership.
- Beneficial ownership is an equal 50:50 split unless you tell HMRC otherwise.
- Each spouse or civil partner is subject to income tax on 50% of the rental profit, irrespective of the proportion you own beneficially.
- It is possible to inform HMRC of the actual beneficial ownership ratio and this especially useful from a tax perspective if one partner has a lower income or unused allowances.
- You have to proactively tell HMRC by completing a Form 17 'Declaration of Beneficial Interest in Joint Property and Income' and submitting supporting evidence, such as a Declaration of Trust.
- The deemed 50:50 split of ownership is for income tax purposes only and does not affect capital gains tax on the sale of a property, which is always based on actual beneficial ownership.
With our help it can be a very straight forward process to work out what the optimal split of beneficial ownership is in a couple to maximise the overall income you receive after tax. We can also draw up the Declaration of Trust for you to sign, which will be a compliant and legally binding document.
Taking advice from a specialist tax adviser now will be hugely beneficial in the long run, especially from a financial perspective.
Here is a very common scenario that I hope will help to clarify what I've been talking about:
A married couple, Mr and Mrs Jones, jointly own a rental property.
The original capital contribution to the purchase of the house was 20% by Mr Jones and 80% by Mrs Jones. The annual rental profit is £20,000 and Mr Jones reports £4,000 and Mrs Jones reports £16,000 to HMRC.
This reporting of the profits is incorrect for income tax purposes (although if the house was sold it would be correct for capital gains tax purposes).
The correct reporting for income tax purposes is 50% each, so £10,000 each.
If Mr and Mrs Jones wish to split the income tax 80:20 then they can by making a declaration to HMRC on Form 17 - this has to submitted within 60 days of the date from which it can take effect.
To be effective, supporting evidence of the correct beneficial ownership of 80:20 will also need to be provided, which would normally be a declaration of trust signed by both Mr and Mrs Jones confirming their beneficial entitlement to capital and income of the house.
For specialist tax advice please contact Tom Lacey, Chartered Tax Adviser at Moore Blatch solicitors, on 01590 625845 or email@example.com. You can also visit www.mooreblatch.com for further information.