Splitting Income from Properties Between Married Couples

Tax Tips – Business Question:

My wife and I have some properties in joint names but as I put in the most money to buy the properties, it seems only fair that I get the lion’s share of the income from them too. However, I have been told that any income from the properties must be split 50/50 – is this true?

Answer:

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 e.g. management fees; repairs; maintenance and loan interest etc). The highest rate of income tax for the current tax year is 45%.

Joint ownership (or joint tenants) is where the whole property is owned jointly and if one of the joint owners dies then the property automatically transfers to the remaining owners. The interest in a jointly owned property cannot be left in a will until the last survivor becomes sole owner. Because the individuals are entitled to an equal share in the whole of the income and capital gains, they are shared equally and no election can be made for a different split of income.

Common ownership (tenants in common) is where effectively a proportion of the property is owned by an individual. This may be equal or it may be in different proportions. If one of the tenants dies then his/her share goes into their estate and is dealt with by the will or according to the rules of intestacy. If the property is owned in different shares and the owners are not married/civil partners then the income and gains are divided in proportion to the ownership. In the case of married couples/civil partners, the income is treated as shared equally (whatever the beneficial ownership) unless they both make a declaration confirming the actual split of income based on the beneficial ownership of the income. The gain would follow the beneficial ownership.

In certain circumstances, it is possible to vary the ownership of a property which can improve the tax position for the property owners.

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

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

If each spouse is liable to income tax at the same marginal rate, the 50/50 split is acceptable for tax purposes. However if, for example, one spouse is liable at the 45% marginal rate and the other spouse has no taxable income, it is income tax-inefficient for the rental profit to be split 50/50.

In this scenario, it would be more tax-efficient if, say, 99% of the rental income was subject to income tax on the part of 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 rental profit split i.e. 99%/1%. It is also necessary for Form 17 ‘Declaration of a beneficial interest in joint property and income’ to be filed with HMRC.

In the event that the form is not so filed (even if the ownership percentages are 99%/1%) the rental profit is split 50/50 for income tax purposes.

For more information and/or assistance, please do not hesitate to contact me at the email address below or phone our Tax Team

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.