If your property is jointly owned by two or more people, there can be tax advantages in splitting any profits you make between you and your co-owners.
Many people in the UK invest in rental properties to earn extra income. However, when you own a rental property jointly with your partner, the tax implications can be quite complicated. You may wonder how you should split the rental income with your partner to reduce your tax liabilities.
In this guide, we’ll explore the ins and outs of dividing rental income with your partner and help you unlock the potential tax benefits that are available to you.
Tip #1: Understand the Tax implications of Rental Income
Before we discuss how to split rental income with your partner, it’s essential to understand the tax implications of rental income in the UK. Rental income is treated as taxable income, and it’s subject to income tax. If you own a rental property jointly with your partner, you’ll need to split the rental income based on the percentage of ownership.
For example, if you and your partner own the rental property in a 50-50 partnership, you’ll need to split the rental income equally.
But what happens if a 50/50 split isn’t ideal for your situation?
If the legal ownership is different, you can make an application to HM Revenue & Customs (HMRC) using ‘Form 17’. This form is used to request that any profits are taxed in the same proportion as ownership of the property.
Although there are other considerations besides tax, ownership of the property can be varied by one party transferring a share of ownership to the other without any capital gains considerations.
The 50/50 split does not apply where the couple are operating a UK property business which consists of the commercial letting of furnished holiday accommodation. Here the profit can be split as agreed by the parties.
If the property is jointly owned by people who aren’t married or in a civil partnership (siblings or friends, for example), the default is to split the income for tax purposes in the same proportion as ownership of the property.
If you want to split the profits in any other way, you’re free to do so – there are no restrictions to stop this. But, if you do, it would be wise to have a written contract or agreement recording the desired split. Make sure to also split the profits in the same proportion that you declare to HMRC. Refer Tip #4!
Another way to vary any profit split is to operate through a partnership. The partnership profit can be split in any proportion that the partners agree, and does not have to be related to capital contributions or anything else.
However, for this approach to work, there must be a genuine business being carried on. Just owning a property and receiving rental income wouldn’t be enough – there have to be significant additional services being provided for payment.
Tip #2: Consider changing the ownership structure
One way to reduce your tax liabilities is to consider changing the ownership structure of your rental property. If you’re married or in a civil partnership, you can transfer ownership of the property to your spouse or partner. This way, you’ll be able to split the rental income with your partner, and you may be able to reduce your tax liabilities.
However, it’s essential to note that if you transfer ownership of the property to your spouse or partner, you’ll need to pay stamp duty land tax. You may also need to pay capital gains tax if you sell the property in the future. Therefore, it’s important to seek professional advice before making any changes to the ownership structure of your rental property. At AccNet, our help is readily available to clarify any doubts you may have.
Tip #3: Use Spouse or Partner’s Personal Allowance
Another way to reduce your tax liabilities is to use your spouse or partner’s personal allowance. In the UK, every individual is entitled to a personal allowance, which is the amount of income you can earn before you start paying income tax. In the tax year 2022/23, the personal allowance is £12,570.
If your partner earns less than the personal allowance, you can split the rental income so that your partner receives the income up to the personal allowance. This way, you’ll be able to reduce your tax liabilities as your partner won’t have to pay any income tax on the rental income they receive.
Tip #4: Create a Declaration of Trust
Creating a declaration of trust is another way to split your rental income with your partner. A declaration of trust is a legal document that outlines the ownership structure of a property. It allows you to specify the percentage of ownership and how the rental income should be split.
By creating a declaration of trust, you can split the rental income with your partner in a way that’s different from the percentage of ownership. For example, if you own the rental property in a 70-30 partnership, you can specify in the declaration of trust that the rental income should be split 60-40.
Tip #5: Use a Limited Company
Another option to consider is to use a limited company to own your rental property. By doing this, you’ll be able to split the rental income with your partner as shareholders of the company. This way, you’ll be able to reduce your tax liabilities as you’ll be able to pay corporation tax, which is currently 19%, instead of income tax.
However, it’s essential to note that setting up a limited company can be quite expensive, and there may be ongoing administrative and legal costs. Therefore, it’s important to seek professional advice before making any changes to your rental property ownership structure.
Need tax advice on maximising your rental income?
Dividing rental income with your partner can be a smart financial move that can unlock potential tax benefits and help you maximize your savings.
By understanding the rules and regulations surrounding rental income division, you can ensure that you are taking advantage of all the tax benefits available to you. Whether you’re a seasoned property investor or just starting out, working with your partner to divide rental income can be a valuable strategy for achieving your financial goals.
Despite having much needed information at hand, navigating the complex world of taxation and property ownership can be daunting in reality. At AccNet, our expertise and experience can help you navigate the tax laws and regulations surrounding rental income and ensure that you’re maximizing your tax efficiency.
Call us today on +44 207 097 3767 to clarify your doubts and receive personalized advice, tailored to meet your requirements.