Jointly-owned property and rental income: Whose is it?
Property that is let out is often owned jointly. The nature of the relationship between the joint owners will generally depend on how the rental income is taxed. (1) Joint owners are spouses or civil partners Perhaps the most common situation where a property is owned jointly is where it is owned by spouses or civil partners. If the jointly-owned property is let out, special rules apply to determine how the rental income is allocated between the spouses or civil partners for tax purposes. The default position is that the rental income is treated as arising in equal shares, regardless of the actual underlying beneficial ownership of the property. This will not always give the best result from a tax perspective. There is some scope to change this allocation, but only where the actual ownership shares are unequal. In this scenario, both parties can elect for the rental income to be taxed in accordance with their beneficial ownership. An election must be made on Form 17 (which can be found on the Gov.uk website at www.gov.uk/government/publications/income-tax-declaration-of-beneficial-interests-in-joint-property-and-income-17). Evidence of the actual ownership of the property must be submitted with the election. Form 17 elections: Points to note There are some points to note here. A Form 17 election can only be made where the spouses or civil partners own the let property as tenants-in-common. Under this form of ownership, each partner owns a share of the property individually. By contrast, a Form 17 election is not possible if the property is owned as joint tenants; where this is the case, both parties jointly own the whole property and rental income can only ever be shared 50:50. Where a Form 17 election is made, it must reach HMRC within 60 days of the date of the last signature for it to be valid. The election will not apply if it is received by HMRC outside this timescale. Income is treated as arising in accordance with the underlying beneficial ownership from the date of the Form 17 election – income received prior to the date of the election is treated as arising equally. Thus, if a couple wishes for the rental income for the tax year to be allocated in accordance with the actual ownership of the property, the election must be made at the start of the tax year. If it is not made until the end of the tax year, it will not achieve its desired effect. Further, the timing rules means that it is not possible to wait until after the end of the tax year and see what income each party has had and decide then whether the election would be beneficial or not; it cannot apply retrospectively. A Form 17 election cannot be made in relation to furnished holiday lettings. Instead, separate, more beneficial rules apply, which allow the income to be allocated in whatever proportion the owners choose. While married couple and civil partners only have the option for rental income to be assessed equally or (as long as the property is owned as tenants-in-common) in relation to their actual shares, there is some scope for planning by taking advantage of the ‘no gain/no loss’ rules that apply for capital gains tax purposes to spouses and civil partners to change the underlying ownership to achieve the desired income split. However, as always, there will be costs attached and non-tax implications and these must be taken into consideration. The following examples illustrate some scenarios that may arise in practice. Example 1: No Form 17 election William and Susan are married to each other and jointly own (as tenants-in-common) a flat which they let out. William owns a 20% share of the flat and Susan owns an 80% share. The rental profit is £10,000 a year. Despite the unequal ownership shares, in the absence of a Form 17 election, the income is treated as arising equally, such that they are both treated for tax purposes as receiving rental profits of £5,000. As both Susan and William are higher rate taxpayers, the total tax payable (i.e. £4,000) is the same regardless of whether or not they make a Form 17 election. They are happy with the 50:50 split and do not make an election. Example 2: A better way? Lottie and Carl are a married couple who own a two-bedroom house as joint tenants. The house is let out and delivers a rental income of £12,000 a year. Carl is a higher rate taxpayer, paying tax at 40%. Lottie looks after their young daughters Jade and Emily and has no other income aside from her share of the rental income. In this situation, it would be beneficial for Lottie to receive all or most of the rental income. However, as the property is owned as joint tenants, the only permissible allocation is a 50:50 split. Each is treated as receiving rental profits of £6,000. Lottie’s share is covered by her personal allowance and consequently is tax-free. However, as a higher rate taxpayer, Carl will pay tax at 40% on his share of the rental profits, generating a tax bill of £2,400. The couple could consider putting the property in Lottie’s sole name (taking advantage of the capital gains tax no gain/no loss rule to do so without triggering a capital gain) so that Lottie receives all the rental income. Example 3: Form 17 election Rob and Richard are in a civil partnership. They own a house as tenants-in-common, which they let out, generating rental profits of £18,000 a year. The property is owned in unequal shares, with Rob owning a 20% share and Richard owning an 80% share. In the absence of a Form 17 election, the income is split 50:50 and each partner is taxed on rental profits of £9,000. Rob receives a promotion with effect from 1 May 2019, meaning that he will be a higher rate taxpayer in 2019/20. Richard is a basic rate taxpayer. Consequently, it will be advantageous for the property income to be allocated in accordance with their actual ownership shares. They make a Form 17 election on 6 July 2019. The Form 17 election is effective from 6 July 2019. The profits arising in the period from 6 April 2019 to 5 July 2019 of £4,500 are allocated equally so each is treated as receiving profits for that period of £2,250. The profits for the remainder of the year (£13,500) are allocated in accordance with the actual underlying ownership, so that Richard is taxed on £10,800 and Rob on £2,700. Thus, for 2019/20, Richard is taxed on profits of £13,050 on which tax (at 20%) of £2,610 is payable. Rob is taxed on profits of £4,950 on which tax (at 40%) of £1,980 is payable. The election only applies from the date it was made, not the start of the tax year. Had it been made at the start of the year the savings would have been greater. (2) Joint owners are not spouses or civil partners Where property is owned jointly by persons who are not married to each other or in a civil partnership, there is more flexibility as to the allocation of rental income for tax purposes. The usual situation is for the income to be allocated between the joint owners in accordance with their ownership shares. However, the joint owners may decide to allocate rental profits differently, in which case the allocation for tax purposes will follow the share actually agreed. Example 4: Three sisters and a cottage Rose, Lily, and Poppy are sisters. They jointly own a cottage which they inherited from their grandmother in equal shares. The cottage is rented out, generating rental profits of £6,000 per annum. Rose and Lily have graduated and are working. Poppy is a student. To help Poppy out while at university, they agree that Rose and Lily will receive 10% of the rental profits each, with Poppy receiving the remaining 80%. The split for tax purposes follows the actual split, so Rose and Lily are each taxed on profits of £600, while Poppy is taxed on profits of £4,800. Practical tip Where property is jointly owned, consider the optimal allocation of profits for tax purposes and whether this can be achieved given the nature of the relationship between the joint owners.