How to receive tax efficient rental income from property held jointly by spouses/civil partners
Rental income received from property held jointly by couples, by which we mean spouses and civil partners, is treated for tax purposes as if it is received in equal shares (i.e. 50:50). If couples wish to agree a different division of rental income to be more tax efficient there are certain procedural steps they must take. If one of the individuals is a lower or basic rate tax payer the couple can declare that the rental income belongs to the lower or basic rate tax payer thereby utilising the lower or basic rate tax payer’s personal allowance and only paying the lower rate of tax on the rental income.
How can this be done?
To agree an unequal division of rental income, HMRC require:
1. Evidence of an unequal beneficial interest in the property
Evidence can be provided in the form of a declaration of trust. This is a simple legal deed which is signed by the couple and sets out their interests in the rental income. It shows how income is apportioned and actually received. It is the beneficial interests that are relevant to HMRC for income tax and capital gains tax purposes and the declaration of trust deals with this.
2. A Form 17
Form 17 must be signed by the couple and lodged alongside the evidence with HMRC within 60 days of being signed.
How much will it cost?
The legal costs associated with advising about how to adjust the beneficial interests and for preparing the necessary documents are tax deductible and the amount of income tax saved by adjusting the beneficial interests usually outweighs the legal costs.
Can this arrangement be changed in the future?
Should a couple’s circumstances change, the declaration of trust and Form 17 can be redone to reflect a different apportionment of the beneficial interests and rental income.
Do I really need legal advice? Can I bypass legal advisers?
You will need legal advice to prepare the declaration of trust and consider the wider capital gains tax implications of adjusting the beneficial interests and to understand what happens if you were to separate or die. If you would like further advice please contact Catchpole Law and we would be very willing to help you.