Not really news… but maybe “News to you”
In this occasional series, we look at things that you might not know but knowing could save you some money. This time we look at:
Couples and Property Tax
One of the most common situations is for a couple (married or civil partners) to own a rental property. Quite often it’s just one person that looks after the rental bit but at the same time, the rent is paid in to a joint bank account which is also used to pay out the expenses. Some couples mistakenly think that this is unimportant if they don’t both appear on the Title Deeds at Land Registry, but this isn’t so.
HMRC isn’t just interested in who is on the Deeds because the Deeds only show who has legal title. Typically HMRC will be most interested if the higher income partner isn’t declaring anything for tax. For tax, we have to consider who has a real interest in the property. So, taking our typical couple above, both have an interest because with a joint account they both have an interest in money coming in and going out. They should (most probably) both be telling HMRC about their rental profit or loss.
Ordinarily, HMRC will tax a married couple or civil partnership 50/50 on joint interest rental. (One important exception is with Furnished Holiday Lettings.)
If you don’t want to be taxed equally, you can make a Deed of Trust (setting out a “tenancy in common”) that specifies the proportion of your interest in the property. You would also need to ensure that both of you are now shown on the Title Deeds. There is no capital gains when you do this, by the way!
So typically a couple with a joint bank account could decide that she has 70% and he has 30%. They can do this as part of legitimate tax planning that isn’t artificial, or one person perhaps has paid the deposit and funded repairs from their net salary for example. This Deed of Trust shouldn’t be done lightly because if one party dies, their share will not automatically go to the other so they’ll need to decide what they want to happen, and update their Will. We would always advise couples to take legal advice before making a Deed of Trust because there are also implications for divorce.
But ok, let’s assume you’re both now on the Title Deeds and you’ve done the Deed of Trust.
Unfortunately being married or a civil partner, you can then be treated unfairly for tax. “Unfair” because a married couple or civil partnership must elect to be taxed other than 50/50 within 60 days of making their Deed of Trust.
An unmarried couple do not make any such election. In fact, an unmarried couple can decide how to split their rental profit even if that differs from their beneficial interest – when the property is sold, for example – by making a written agreement.
HMRC itself says so in its own Guidance where it makes the point that jointly owning a property doesn’t make it a property partnership but importantly talking about unmarried couples:
“Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.”
Married Couples and Civil Partners actually get a raw deal compared to other couples, and indeed any other joint owners- because Married Couples have to elect within 60 days.
This isn’t a promotion for not being married or a civil partner but we can help you to “get your property ducks in a row” especially when you’re a married couple or civil partnership-it could save you some unexpected tax bills.
