How can you split your rental income with your partner to reduce your tax liabilities?

How can you split your rental income with your partner to reduce your tax liabilities- WIS Accountancy
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One of the most common questions we get asked is can you split your rental income with your partner? Investors have several options when it comes to reducing their tax liability, with splits being one of the most common.

But the rules around how HMRC treats rental income for married couples are complicated. There are many pitfalls that investors need to be aware of before making the move.

So in this blog, we look at the rules regarding split income from buy-to-let properties and how they impact your income.

Can you split your rental income with your partner?

The rules for how HMRC treats rental income for married couples are well established. When income is received from a jointly owned asset, it is automatically assumed that income is split equally between the two parties.

This is the case regardless of how much each individual contributed towards the purchase. For most couples, this arrangement works well because it allows maximum use of capital gains and tax allowances.

But in some circumstances, it may be beneficial to change how income is allocated. This can be done by making a ‘declaration of trust’ that stipulates each party is beneficially entitled to unequal shares of the property.

To make a declaration of trust, couples need to complete Form 17, available from the HMRC website. Evidence that interests in the property are distributed unequally will need to be provided. This can take the form of a declaration or deed.

Split income example:

Let’s assume you own 70% of the buy-to-let property and your partner owns the remaining 30%. This property generates an income of £8,000 a year. HMRC will automatically treat this as a joint income split, so each party will be taxed on £4,000 of income.

However, that extra income pushes your partner into the top paying tax bracket. So you notify HMRC using a ‘Form 17’ that you own 70% of the property and your partner owns 30%. You will now be taxed on £6000 of income and your partner will be taxed on just £2,000.

What if your partner has no financial stake in the property?

The default position applies here as well. HMRC will automatically treat any income from the property as joint income and split it equally down the middle.

However, you can make a ‘declaration of trust’ which states that you own the net equity of the property, but that you wish any income derived from it to benefit your partner. In this scenario, your partner will be liable for tax on the entire rental income.

But there are complications to this second option that you need to be aware of. Transferring property without the net equity means the deal will be subject to stamp duty.

There is also the risk that the deal may breach the conditions of your mortgage. As buy-to-let specialist mortgage brokers, we can advise you about this.

So if you are looking to go down this route, you should seek advice from an experienced accountant that specialises in property tax. This will ensure you make the right decision for your circumstances.

Joint tenants vs tenants in common

Ownership status should also be considered before deciding how to manage your rental income. Most investment properties owned by married couples in England, Northern Ireland and Wales are held under a joint tenancy. This means that ownership is split equally down the middle.

But it also means that rental income is split 50/50 irrespective of a ‘declaration of trust’. So if you want to change how the shares in the property are distributed, you must first change the ownership status from a ‘joint tenancy’ to ‘tenants in common’.

Changing the status to tenants in common also allows each partner to transfer ownership of their share in the property to a party other than the co-owner after their death. With joint tenancy status, ownership automatically defaults to the co-owner.

When answering the question ‘can you split your rental income with your partner?’, remember that each case is different and you should always consult with an expert before making a final decision.

For more information about the tax implications of property investing, download our FREE property investment guide.

FAQs

Need tax advice about maximising your rental income?

Do you need help maximising your rental income? WIS Accountancy provides a range of personalised accountancy services for property investors, no matter if you are just starting your portfolio or are a seasoned property investor.

Our experienced team of property experts also offer dedicated advice to property developers, landlords and property investors. This includes advice on how to structure your property portfolio to limit tax exposure.

We’re the leading accountants in Borehamwood and offer a full range of services to property investors. Options include specialist mortgage advice through our WIS Mortgages business and insurance through our WIS Business Protection department.

As a family business, you can be assured of a personalised service tailored to meet your financial goals. So get in touch with our friendly and professional property services team today by calling us on 0203 011 1898 or fill out the contact form to schedule an appointment.

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