Save Tax – Split the Rent
It seems timely with the deadline for paying and submitting a landlords self assessment tax return having just passed on the 31.01 to mention a way of reducing your potential liabilities for next year. This should be of particular interest to parents of student offspring who they have or are about to buy accommodation for them to live in whilst undertaking their studies. It also applies to any unmarried property owners that jointly own and let a property. Many people assume that when a property is jointly owned that any rental income would have to be distributed in accordance with their ownership of the property. For instance where a property is owned 50:50 then the natural assumption is that the rent is distributed in the same proportions. However, there are situations where the rent can be shared out in varying proportions with tax advantages to each party.
Take for example the situation where a property is owned by you and your student daughter. You own 90% of the property whilst she has the remaining 10%. The net rental income in any one year is £5,500. This would normally give you an income of £4,950 pa and your daughter £550. As a higher rate taxpayer your share of the rental income is subject to 40% tax. Your daughter being a student does not pay anything. However, as a generous father you subsidise your daughter’s living expenses out of your net income. A more tax efficient way of ‘subbing’ your offspring would be to split the rent 90:10 in favour of your daughter. This would give her £4,950 which would just be under her personal tax limit of £5,035. Your £550 share would be taxed at the top rate of 40%, but would give you just enough revenue to pay for minor repairs. The result of the whole exercise is that you save £2,200 in tax.
Would HMRC agree to this?
Yes, according to their Property Income Manual (PIM 1030), “joint owners can agree a different division of profits and losses and so occasionally the share of profits or losses will be different from the share in the property. The share for tax purposes must be the same as actually agreed.” It would be advisable that a short agreement advising of the share of profits be written at the beginning of the tax year and signed by the joint owners. Therefore, if HMRC ever challenged the agreement, simply quote their guidance back to them.
Capital Gains Tax
The agreement will have no effect on the CGT split should you sell the property. Therefore, any taxable profit arising on the sale of the property would be divided based on the actual ownership; in this case 90% to you and 10% to your daughter.
Married or civil partners
The above does not apply to those who are married or registered civil partners.The default splitting of of rental profits on a buy-to-let property for married couples is 50:50 a so called ‘joint tenancy’. This is fine when both parties are on a similar tax treatment however where couples on a dramatically different tax rate there are considerable advantages for couples to then dictate the percentage ownership and attribute the rental profits to a partner with unused allowances or a lower marginal rate. This can be done legally by providing evidence to the claim for unequal beneficial ownership such as a declaration of trust. This must be submitted to HMRC with a special form specifying the percentage ownership.. Once the form has been signed and dated it much reach HMRC within 60 days of signing to be effective. Swtiching ownership shares works for married couples and civil partners as the transfer is exempt from capital gains tax. The form that landlords will need to complete is the Income Tax: declaration of beneficial interests in joint property and income (form 17).
This arrangement has considerable taxation merits where there are two or more parties involved with a property where one, the senior partner is a higher rate tax payer and the junior partner is associated with them but pays less income tax. A typical scenario would be the example given above between a senior and a parent and their semi dependent adult.