Splitting your rental income with your partner
Posted on 3rd February 2022
Renting out a property in the UK will provide you with a rental income that is subject to income tax, minus any relevant tax-deductible expenses incurred, such as house insurance premiums, loan interest, maintenance fees and property repairs.
If you live with your spouse or civil partner and have an income generated from renting out a jointly owned property, the HMRC’s default position is that you will be taxed on an even 50/50 split of the income.
In the UK, spouses or civil partners may have vastly different income levels. One of you may not work and therefore doesn’t pay income tax, whereas the other may be a high earner taxed at 45%. In this scenario splitting the rental income to be taxed in an alternative ratio can be beneficial for tax purposes.
Efficient income tax split
It is possible to apply for the income tax ratio to be applied differently, for example if one of you put in more capital to buy the property than the other person.
To achieve an uneven split for tax purposes, you will need the underlying ownership of the property to be in-line with the rental profit split. The first step in this process would be to legally change the beneficial ownership of the property (see below).
You would then need to complete and submit Form 17 to HMRC with the required supporting evidence in the form of a declaration or deed (see below).
No split other than a 50/50 ratio will be accepted until a satisfactory declaration is received.
Conditions to consider
There are several factors that you will need to consider before completing this process:
The form must be completed jointly by spouses or partners who are living together.
Couples who have separated are not subject to the 50/50 tax rule. They would be taxed on their property ownership ratio.
You do not have to split the income tax owed according to property ownership ratio. If one of you owns 80% of the property and the other 20%, you can still accept the standard 50/50 split.
If your circumstances change and you want the income tax split ratio to be altered, you will need to submit a new form 17 and valid evidence.
This form is only applicable to those who are living together as a couple. If the property is owned by siblings or a parent and offspring, the 50/50 rules doesn’t apply.
Beneficial ownership
So, how do you change the beneficial ownership of a property?
Firstly, it is important to understand that this is a legal process, so would usually be managed by a conveyancing solicitor. It is not something you want to chop and change regularly.
You will need to:-
Sever your joint tenancy agreement and register as tenants in common.
As tenants in common, you can complete the Declaration of Trust to legally define the beneficial interest you each hold and therefore what proportion of the property you are each responsible for.
Alternatively, you can complete a Floating Deed of Trust where your beneficial interest in the property changes in line with your individual contributions towards the mortgage repayments, property repairs and renovations.
If you wish one person to hold 100% of the beneficial interest. You will need to submit a Declaration of No Interest from the person who will have 0% beneficial interest in the property.
Once you have the correct deed or declaration that legally defines your share of beneficial interest in the property, you can complete and submit HMRC’s Income Tax from 17.
Please note there are usually fees involved in each step of this process.
We recommend that you take legal advice before changing your rental income tax split ratio, as when you come to sell the property, these changes may affect the split of the sale proceeds and any resulting capital gains tax.
If you are considering changing the split of your rental income, contact us to how we can help.
Written by:
Nicola J O'Sullivan -
Effective Accounting
Founder | Xero Champion | IR35 Expert
Tagged as: FAQ, For - Property Owners & Landlords
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