Farms and Estates update: Spouses splitting income and gains from rental properties

Published: Wednesday 17 February 2021

It is worth reviewing how rental properties are owned between married couples. With property sales taking place now there might be tax savings to be had on disposals, or it might just be worth reviewing how the rental profits are taxed.

Income tax

The renting out of property by individuals produces rental income which is subject to income tax on the part of the beneficial owner of the property (less relevant tax-deductible expenses, for example, management fees; repairs; maintenance and loan interest etc.).

Where a property is owned jointly by spouses, each spouse is subject to income tax on 50% of the rental profit irrespective of the underlying percentage ownership of the property.

Thus, for example, if one spouse owns 80% and the other spouse owns 20% of the property any rental profit tis still treated as arising 50/50 to each spouse for income tax purposes.

Where both spouses are liable to income tax at the same marginal rate, there is no downside to the 50/50 split. However if, for example, one spouse is liable at the 45% marginal rate and the other spouse has no taxable income, it would be more tax-efficient if, say, 99% of the rental income was subject to income tax on the spouse who has no other taxable income.

This is achievable, but it requires that the underlying ownership of the property is in line with the desired rental profit split, i.e. 99%/1%. It is also necessary to submit an election to HMRC (Form 17 ‘Declaration of beneficial interest in joint property and income’) to record the allocation. HMRC must be notified of the change within 60 days for it to be fully effective for income tax.

Capital gains tax

Property can be transferred between spouses without triggering a capital gains tax (CGT) charge. Transfers between spouses are made at nil gain/nil loss.

If there is a planned sale of the property, there could be advantages of putting the property into joint names prior to the disposal so that both spouses benefit from the use of their CGT annual exemption (currently £12,300) and utilise their basic rate tax bands for any part of the gain that falls within the basic rate. 

CGT rules changed on 6 April 2020 and now, if property is transferred into a spouse’s name, the acquirer will ‘inherit’ their spouse’s period of ownership and occupation history of the property. This means that if the disposing spouse had lived in the property at some point in the past, by putting the property into the other spouse’s name, there will be no loss of principal private residence (PPR) relief on a future sale.

Other considerations

As always, when considering any tax planning always be mindful of other issues. If the property has debt secured on it then transferring this to a spouse could trigger a stamp duty land tax (SDLT) charge if the value of any debt transferred between spouses exceeds £40,000. Also bear in mind that when property is put into joint names this puts value in the other spouse’s estate for inheritance tax purposes and might cause complications in the event of death, divorce or dispute.

Careful planning is essential and full consideration of the facts needs to be undertaken before any planning is implemented.

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Shirley Roberts
Shirley Roberts
Associate Director
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