Buy-to-let property ownership and Income Tax
The joint ownership of properties for Income Tax purposes has a number of different treatments depending on whether the properties are owned jointly by spouses, or civil partners, or whether they are held jointly between family members.
29th April 2021
Paul Neate See profile
The other important point to fully understand when you own the property is the legal consequences of holding the property as Joint Tenants, or as Tenants in Common. Your legal adviser should be able to help you understand the current ownership of any property you have an interest in. Where you hold property as Joint Tenants, then on the death of one joint tenant, their interest automatically vests with the remaining joint owners, irrespective of what any Will may say. Property held as Tenants in Common will be distributed in accordance with your Will. Where you wish to convert property held as Joint Tenants into property to be held as Tenants in Common, then you need to enter into a deed to sever the joint tenancy first.
If you own property as Joint Tenants, then the income which you generate on that property is shared 50:50 between spouses and civil partners. If held by other family members, then the income is also shared equally between the total number of owners.
Making Tax Digital for reporting taxable income is expected to come live from 6 April 2023, and each joint owner will have to make quarterly returns to HM Revenue and Customs where their total income exceeds £10,000. It’s recommended to use dedicated software for this which at the moment is in development with a number of organisations, such as Xero for example.
Where you hold a property as Tenants in Common, then the income for spouses and civil partners, under Section 836 of the Income Tax Act of 2007 is shared 50:50, regardless of the beneficial ownership proportion. Therefore, if you wish to share the income in accordance with the beneficial ownership, you need to complete Form 17 and submit this to HM Revenue and Customs, together with the Declaration of Trust confirming the beneficial ownership, within 60 days from the date that the second signature is added to the form.
The allocation of the income in the beneficial ownership proportions will be from the date of the Form 17, but not before. Therefore, if a property held by a spouse, or civil partner, is currently held by one of them, they can enter into a Declaration of Trust to give away say a 1% share to the other spouse. This will not be chargeable to Capital Gains Tax or will be a Potentially Exempt Transfer for Inheritance Tax purposes, but it will result in the income being shared 50:50 even though the beneficial capital ownership is held 1% by the other spouse, or civil partner. This may help utilise a spouse’s lower rate tax band, and or Personal Allowance.
However, if the property is held 25% by one spouse and 75% by the other and it’s advantageous for the spouse holding 75% to have more of the income, then Form 17 should be completed.
Where you are owning properties with other family members, or wish to share it with other family members, it’s important to note that where the beneficial capital ownership changes, in particular if you are including children, that this is a Capital Gains Tax disposal.
With regards to the income, if the children are minors, then the income is still taxed on the parent who made the gift, but if the children are of age, then they’re responsible for their share of the income.
Where there are joint owners of property and the children do own a small interest in the capital, you could still enter into a Declaration of Trust to change the income sharing entitlement without changing the capital ownership element. This will require a solicitor to draw up the document. This therefore can allow them to use their Personal Allowances and basic rate tax bands, to help with their school fees, etc.