06 Sep Landlord Accounting — How is Jointly Owned Property Taxed in the UK?
The steady increase in house prices in the UK have made owning a property increasingly difficulty. That’s why a lot of individuals are jointly owning properties to earn rental income. Rental incomes are subject to tax, and this Due to rising house prices, joint ownership of properties is becoming common. Rental income of the jointly owned property is taxed, and this can be a significant outgoing in case of higher income properties. In this post, you will learn how jointly owned properties are taxed in the UK.
Jointly Owned Properties — Tax Implications
HM Revenue and Customs (HMRC) taxes rental income received from one or more properties based on the share of ownership. In other words, a landlord’s rental income on jointly owned properties is based on the share of ownership.
A simple example will clarify how jointly owned properties are taxed by the HMRC.
Suppose that Alli and Pickford are friends and invest in a property together. Alli owns 70 percent of the property while Pickford owns the remaining 30 percent.
The property is rented out and the rental income amounts to £30,000 and allowable expenses amount to £15,000. This results in a net profit of £15,000. The share of profit for each partner is as follows.
Alli (70 percent): £21,000
Pickford (30 percent): £9,000
The rental income of the jointly owned property will be taxed according to the rental income of each partner. You should consult with a professional landlord accountant in London to know exactly how rental income will be charged in your case.
Tax on Jointly Owned Properties in Case of Married Couples
In case a property is jointly owned by married or civil partners, the default share of each partner is 50 percent. This is irrespective of what each partner actually receives, which may not be the most efficient way to tax the rental income.
Suppose that Beckham and Louise are a married couple. They jointly own four properties that they let out. The rental profit amounts to £40,000 per year. Beckham is an additional rate taxpayer as owns fashion store. Louise works part-time in a clothing shop and is a basic rate taxpayer as she earns £45,000 a year. The rental income will be split equally and each spouse will receive an income of £20,000, which will be taxed according to the income of each partner.
Beckham will pay £9,000 (£20,000 * 45 percent)
Louise will pay £4,000 (£20,000 * 20 percent)
Married couples and individuals in a civil partnership can override the default equal ownership of joint property. They can elect to be taxed according to the actual ownership in a property by submitting a Declaration of Beneficial Internist, Form 17. In this way, the partners who actually own the property with unequal shares will be taxed according to actual share in the joint property.
However, the partners need to provide proof as to why their rental income should be taxed according to unequal shares instead of the default 50:50 split.
Let’s suppose that Hunt and Rowan are married couples and own two properties which they let out. Hunt owns 60 percent of the property while Rowan owns the remaining 40 percent of the property. Both are taxed at the basic rate.
Assume that the net income from rental property is £10,000. In the default case, each partner will be taxed on £5,000.
However, if the partners submit Form 17 that is accepted by HMRC, the share of each partner that will be taxed will be as follows.
Hunt (60 percent): £6,000
Rowan (40 percent): £4,000
In this situation, Hunt will pay £1,200 tax on rental income, while Rowan will pay £800 tax on rental income of the jointly owned property.
The ownership of the property can be changed to minimize tax on rental income. The property can be transferred between partners on a no gain/loss basis. In this way, their share of ownership can be changed that could minimize the tax amount.
However, transfer of property ownership involves certain risks. You should consult an experienced landlord accountant in London to know how to legally transfer a share of jointly owned properties between partners. This will help avoid any unintended legal repercussions due to not meeting required rules for transfer of property ownership.