Property that is jointly-owned may be rented out. Due to the fact that persons are taxed on an individual basis, the income must be allocated in order to determine how much tax each joint owner is responsible for paying. Income from jointly held property is taxed differently depending on the nature of the connection between the two owners.
No marriage or civil partnership
Assuming there is no property partnership, when the property is jointly owned by individuals who are not married or in a civil partnership, the income deriving from the property will typically be allocated in accordance with each person’s share in the property. Taxes are taxed on the income that each individual receives.
Example of taxable income
Andrew, Alison and Anthony are siblings who own a property jointly, which is rented out. Andrew owns 50 per cent of the property, Alison owns 30 per cent, and Anthony owns the remaining 20 per cent.
The property provides a rental income of £10,000. Andrew gets £5,000, Alison gets £3,000, and Anthony gets $2,000, all based on their ownership stakes. Each gets taxed on the share that they receive.
An alternative profit split might be agreed upon by the co-owners instead of sharing earnings in proportion to their ownership shares. If they do, they are taxed on what they get.
Spouses and civil partners
When a property is held jointly by married or civil partners, the default position is that the income is allocated 50/50 for tax purposes, irrespective of the amounts they actually receive. This may be advantageous from a tax planning aspect if spouses or civil partners have variable marginal rates of tax. The no gain/no loss capital gains tax laws may be utilised to transfer a tiny share in a property to a spouse or civil partner paying tax at a lower rate, transferring 50 per cent of the income for tax purposes in the process.
As a result of his larger income, Frank pays a higher tax rate. He owns a property yielding a rental income of £20,000 annually. He gives his wife Felicity, who barely earns £15,000, a 5% ownership of the property. Frank and Felicity are each taxed on £10,000 of the rental income. On her share, Felicity is taxed at a tax of 20%. Frank would have had to pay 40% tax on the whole rental income if the property remained solely in his name. Taking use of the regulations saves them a tax of £2,000 a year. This provision does not apply to profits from furnished holiday lettings.
Use of Form 17
Where spouses or civil partners hold property jointly in unequal shares, they may elect for the profits to be taxed by reference to their true ownership shares. Ownership as tenants in common (with each party owning an equal share of the property) makes this conceivable, but the income is still shared 50/50 if the property is held by joint tenants (with each party having equal rights over the whole property).
Form 17 is used to make the election. It must be signed by both spouses/civil partners and specify their ownership shares in the property. The income split takes effect from the latest signature and must be received by HMRC within 60 days.
To modify the ownership split without generating a taxable gain, the option to elect for income to be taxed according to ownership shares provides tax planning possibilities.