Do you own and let out a residential property you own jointly with your spouse or civil partner?
If so, you must both report any income you earn from letting it out, and unless you notify them otherwise, HMRC will assume that you own the property equally.
At Inca, we help many people with second homes to stay compliant and tax-efficient. But when meeting a new client, it’s not unusual to find out that they’re either unaware of their joint reporting responsibilities; or correctly reporting their rental income but paying more tax than they need to.
Before we address each of these points, it’s important to clarify that we’re talking about traditional buy-to-let properties as opposed to holiday lets which are subject to different tax rules.
Are you reporting your rental income correctly?
If you own a rental property and your rental income is more than £1k, you must let HMRC know. Owners earning rental income between £1k and £2.5k only have to advise HMRC, but if your income is between £2.5k and £10k after allowable expenses – or more than £10k before allowable expenses, you must report it on a Self Assessment tax return.
Crucially, if you own the property jointly with your spouse or civil partner, both of you must report your share of the income and expenditure.
Increasingly, HMRC is making use of financial information shared by banks and building societies to identify individuals who are failing to declare income of this kind – either through ignorance or on purpose.
If you should have been declaring income but haven’t, you need to let HMRC know. You may incur a penalty, but you’re likely to be treated more leniently than if you put HMRC to the trouble of tracking you down.
You can make a voluntary disclosure through The Let Property Campaign, which allows you to advise HMRC of any unpaid tax from previous years, bring your affairs up to date and get the best possible terms to pay back any tax you may owe.
Are you paying more tax than you need to on your rental income?
Every taxpayer is eligible for a tax-free property allowance of up to £1k. If you own a property jointly with your spouse or civil partner, each of you is eligible to set the allowance against your share of the gross rental income. HMRC will automatically assume that each of you has a 50% share in the equity.
However, using this default ratio to calculate each partner’s tax can leave many couples overpaying tax on their rental income, particularly where one partner pays tax at a higher rate than the other.
Since spouses and civil partners are allowed to gift assets to one another without tax implications, couples in this position can potentially reduce their tax liability significantly by altering their share of ownership in a property.
It’s relatively easy to legally change the ownership split in a jointly owned property (you’ll need to let HMRC know and provide evidence of your unequal share split – usually in the form of a declaration of trust and Form 17).
Take the example of a couple in different tax bands earning £10k annually from a jointly owned rental property. The 50/50 default ratio will see both partners having to pay tax on £5k – one at 40% if they’re a higher rate taxpayer and the other at 20% if they’re a lower rate taxpayer.
Changing their percentage ownership split to 99/1 in favour of the lower rate taxpayer would save them about £1k a year as a couple.
While the size of any saving will reduce if one partner is an additional rate taxpayer and the other a higher rate taxpayer, it’s still likely to be attractive and worth considering making a change.
What if a couple decides to separate? It’s something clients often ask. Obviously, no one can predict what the future holds, but our advice to clients is always to work with what they have in the present and do what’s in their best financial interests now. If it should happen, the arrangement is easily reversed, and in a divorce, all assets owned by a couple – including property, will usually be divided equally.
At Inca, we have nearly 20 years’ experience helping buy to let property owners stay compliant and tax efficient. If you’d like to adjust the ownership ratio of your jointly owned rental property, we can advise you on how best to structure income between you and your partner, so your tax efficiency as a couple is optimised. And if you’ve not been reporting rental income, we can help you put things right and support you in your dealings with HMRC.
Get in touch with one of our advisors today.