In our regular Q&A series from Croner Taxwise, tax adviser, Marsha Haywood explores how joint rental income tax can be divided between owners more tax efficiently
Q. My husband and I jointly own a rental property, the income of which we declare 50:50 on our Tax Returns. I have been promoted and will be a higher rate taxpayer going forward. Is it possible for my husband to be taxed on a greater proportion of the rental income as he is a basic rate taxpayer?
A. A married couple (or those in a civil partnership) who are living together and own a rental property in joint names are generally treated as entitled to half of the income each. This deeming rule is found in s836 Income Taxes Act (ITA 2007) which states - this section applies if income arises from property held in the names of individuals who are married to, or are civil partners of, each other, and who live together. The section also applies if individuals are treated for income tax purposes as beneficially entitled to the income in equal shares.
The legislation then goes on to state there are some exceptions, which include UK qualifying furnished holiday accommodation and partnership income. Providing your rental property is not a qualifying furnished holiday letting, none of the exceptions will be relevant to your situation.
It is however possible to put in place a declaration of trust over the property to change the beneficial ownership so that your husband owns a greater share of the property and can then be taxed according to the new split.
The s836 deeming rule would however still apply at this point so it would also be necessary to make a declaration under s837 ITA 2007 which would then override the deeming rule.
The declaration can be made on HMRC Form 17, Declare beneficial interests in joint property and income. This only takes effect for income arising on or after its date, provided that Form 17 is forwarded to HMRC within 60 days of the declaration date. Evidence of the beneficial interest must also be provided at the same time. Any valid declaration then remains in place until the interest in either the income or capital cease to be in line with the declaration.
It is important to remember that you cannot simply elect under s837, using Form 17, without having firstly entered into the declaration of trust.
The transfer of a beneficial interest between spouses (or those in a civil partnership) would, under s58 Taxation of Chargeable Gains Act 1992 (TCGA 1992), be a no gain/no loss transfer so no capital gains tax (CGT) would be payable. The base cost of the additional share he receives would be the original cost of it. It is worth noting though that as CGT follows the beneficial ownership any proceeds from a future disposal would be split in the ratio of the ‘new’ beneficial ownership in place at the time of sale.
However, there is no spouse exemption for stamp duty land tax (SDLT), land and buildings transaction tax (LBTT) in Scotland or land transaction tax (LTT) in Wales (depending on where the rental property is). Although it is assumed there will be no direct payment for a change in the beneficial ownership, changes in existing mortgage debts are deemed consideration for these purposes. As the property is already in joint names, it is assumed that any mortgage will already be in joint names. However, these rules need to be carefully checked to ensure there are no unexpected consequences.
About the author
Marsha Haywood, tax adviser at Croner Taxwise, tel: 0844 892 2470
This article first appeared on Croner Taxwise