Update on rental income
Nicola Plant of Pemberton Greenish provides an update on changes to the way that rental income is taxed.
In the case of spouses/civil partners who own property jointly, HMRC will normally treat the rental income from that property as if it belonged to the couple equally and tax each on half the income accordingly.
However, if one of the individuals is a lower or basic rate tax payer it may be more tax efficient to declare the income as belonging to them, so making use of their personal allowance and subsequently paying tax on rental income at a lower rate.
Couples and their advisors should be aware of recent guidance published by HMRC on the taxation of income from property. Most significantly, whilst HMRC have previously only asked for evidence of beneficial ownership in the case of bank and building society interest, this requirement will also apply in respect of all types of property.
For example, in the case of a husband and wife, it is not uncommon for the legal title to ‘buy to let’ property to be held either in the sole name of the husband (especially if they are the higher earner and a mortgage was required), or in joint names, but rental income to then be declared as belonging to the wife, so as to make use of her personal allowance and marginal tax rates.
As well as completing HMRC’s updated Form 17 (Declaration of beneficial interests in joint property and income), in future couples will need to submit that form to HMRC with evidence of their beneficial interests before they will be taxed otherwise than equally. Evidence is provided by way of a formal deed, called a Declaration of Trust, signed by the couple, setting out their respective beneficial interests in the property.
A Declaration of Trust is a simple form of trust, which essentially states that although the legal title is owned by one or both parties, the beneficial interests (i.e. the right to receive income) is held by the party wishing to declare it on their tax return.
Therefore, whilst HM Land Registry might show the legal title to the property as being in joint names, the Declaration of Trust would sit behind the legal title, providing evidence of the way in which the actual benefit is apportioned and rental income paid between the couple.
The Declaration of Trust can be amended later in the event of a change in circumstances, so that the beneficial interests are again held equally, or otherwise. A further Form 17 and a copy of any new Declaration of Trust must be submitted to HMRC within 60 days of the change.
In all cases couples should receive appropriate legal and tax advice before signing a deed altering their legal or beneficial interests in jointly held property.
Advice should be wide enough to include the effect that any change in beneficial ownership might have for capital gains tax purposes on the sale of the property, or if the couple were to separate. Further detailed guidance from HMRC and a link to the new Form 17 can be found here.
By Nicola Plant of Pemberton Greenish
