Allocating income for tax when property is jointly owned

Property that is jointly-owned may be let out. As people are taxed individually, the income must be allocated in order to work out the tax that each joint owner is liable to pay. The ways in which income from jointly-owned property is taxed depends on the relationship between the owners.

Joint owners are not married or in a civil partnership

Assuming there is no property partnership, where property is jointly-owned by persons who are not married or in a civil partnership, the income arising from the property will normally be allocated in accordance with each person’s share in the property. Each person is taxed on the income that they receive.

Example

Andrew, Alison and Anthony are siblings who own a property together which is let out. Andrew owns 50% of the property, Alison owns 30% and Anthony owns the remaining 20%.

The property generates rental income of £10,000. The income is allocated as follows in accordance with the ownership shares:

• Andrew: £5,000;
• Alison: £3,000; and
• Anthony: £2,000.

Each is taxed on the share that they receive.

The joint owners do not have to share profits in accordance with their ownership shares – they can agree a different split. If they do, they are taxed on what they actually receive.

Spouses and civil partners

Where property is owned jointly by spouses and civil partners, the default position is that the income is treated as being allocated 50:50 for tax purposes, regardless of the amounts that they actually receive. This can be useful from a tax planning perspective where spouses or civil partners have different marginal rates of tax. The no gain/no loss capital gains tax rules can be used to transfer a small share in a property to a spouse or civil partner paying tax at a lower rate, transferring 50% of the income for tax purposes in the process.

Example

Frank is a higher rate taxpayer. He owns a property generating rental income of £20,000 a year. He transfers a 5% stake in the property to his wife Felicity, whose only income is a salary of £15,000. Frank and Felicity are each taxed on £10,000 of the rental income. Felicity pays tax at 20% on her share. Had the property remained in Frank’s sole name, he would have paid tax at 40% on the full amount of the rental income. Taking advantage of the rules saves them tax of £2,000 a year.

This rule does not apply to income from furnished holiday lettings.

Form 17

Where spouses or civil partners own a property jointly in unequal shares, they can elect for the income to be taxed by reference to their underlying ownership shares. However, this is only possible where they own the property as tenants in common (and each own their own share); where the property is owned as joint tenants (and as such the owners have equal rights over the whole property), the income split remains 50:50.

The election is made on Form 17. It must be made by both spouses/civil partners jointly and they must declare that they own the property in the shares stated on the form. The income split takes effect from the date of the latest signature, and to be effective must reach HMRC within 60 days of the signature.

The ability to elect for income to be taxed in accordance with ownership shares opens up tax planning opportunities, particularly as use can be made of the capital gains tax no gain/no loss rules for transfers between spouses and civil partners to change the ownership slip without triggering a chargeable gain.