Income tax on joint buy-to-let properties: What you need to know

If you jointly own a buy-to-let property and currently receive rental income, then the income tax you pay can be different depending on what your joint relationship is.

Whether you are spouses, civil partners, or whether the property is held jointly between family members, this will have an impact on your income tax.

Whatever relationship you have, the most important point to fully understand however, is whether you decide to be Joint Tenants or as Tenants in Common for the buy-to-let property.

Joint Tenants

If you own property as Joint Tenants, then the rental 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. This means income tax is also split equally.

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.

Tenants in Common

If you hold a property as Tenants in Common then while the ownership is 50:50 the rental income may be split differently such as 80:20. However unless you submit a “Form 17” (further details below) then your income tax is still charged at a 50:50 share regardless of the ownership split. This means that if a buy-to-property made £5,000 in a year and the income split was 80:20, equalling £4,000 and £1,000, the income tax would still be charged on £2,500 each. However this can be changed with the submission of Form 17.

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.

Capital Gains Tax & children

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.

Wills

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 would like to discuss joint ownership for buy-to-let properties or have any other ownership queries, then please do get in touch.