Income tax on jointly owned property
Written by Ray Coman
In many cases where property is purchased primarily as an investment, a secondary residence is let. Rental profits are subject to tax, and this can be a significant outgoing for higher earning taxpayers. When owning property in joint names, which typically occurs on marriage, the income tax considerations should be reviewed for the possibility of tax savings.
Residency
An individual is subject to income tax on rental profits for property situated in the UK, regardless of where that person is resident. For non-resident landlords, a separate system of self-assessment is administered by HMRC. Some non-residents may be entitled to a UK personal allowance, depending on their nationality and place of residence. As a consequence, it is possible that there are implications arising where one or more owners of a property is non-resident or plans to become non-resident.
Marriage
A typical outcome of marriage is that all property becomes jointly owned. By default, both spouses are deemed to receive half the income from a jointly owned property, regardless of the actual ownership of the property. If property is owned in unequal proportions a married person can opt to have the income taxed according to the actual ownership.
By contrast, for unmarried joint owners, it is possible to transfer beneficial ownership (i.e. to enjoy the rents) without also transferring legal ownership (as per the title deeds). Therefore, as an unmarried couple, the capital ratio (for CGT purposes) could differ from the rental profit sharing ratio (for income tax purposes).
It is possible for the combined tax liability of a couple or other property owning partnership to be reduced by transferring assets to the property owner subject to tax at a lower rate.
Finance
A landlord is able to obtain tax relief for interest on borrowings up to the value of the property when it was first let. Therefore, it is more tax efficient to borrow funds for the purpose of letting a property than for the purposes of buying a home for oneself. Where finances arrangements alter, for instances on transfer of a property into joint names, there is an opportunity to reconsider the overall tax position and determine any opportunities for tax saving.
Combining ownership of a property involves sharing risks and rewards, of which tax can become an integral part. Please consult a professional adviser about the implications of current or proposed property transactions.
Comments
Beneficial ownership rather than legal ownership determines the split for capital gains tax. If there is no contract determining the division of income it may be hard to prove beneficial ownership.
Hopefully you will be able to demonstrate that you were the beneficial owner from the date of exchange, in which case no transfer of value has taken place for capital gains tax purposes when the property changes hands.
We declare partnership on some of these properties. I have asked to be put as a joint owner. What issues do you see?