Tax on rental income question

A_little_lost

Thank you for your reply.

I am still a little unclear - what do you mean by making the election to HMRC?

I am about to purchase a property outright, but would like my partner to also part own it (as he will be assisting me with renovating the property), so understood 'tenants in common' would be a way of handling this. I also need him to part-own the property as at some point in the future I will be purchasing further property with the need to re-mortgage this first property to get together a deposit . . . but I have insufficient salary to enable me to get a good mortgage deal, and he has a good salary.

Is setting up 'tenants in common' a job for the conveyancer, or can I do it myself?

holly_hobby

A_little_lost wrote: »

Thank you for your reply.

I am still a little unclear - what do you mean by making the election to HMRC?

Telling HMRC how the rental income is split for income tax purposes - you do have to pay tax on net rental income at your highest rate

A_little_lost wrote: »

I am about to purchase a property outright, but would like my partner to also part own it (as he will be assisting me with renovating the property), so understood 'tenants in common' would be a way of handling this.

Yes it is - or as joint tenants, which gives you automatic equal shares ie 50/50, which upon death is automatically transferred to the surviving owner ie they would inherit the deceaseds share and own the whole property

A_little_lost wrote: »

I also need him to part-own the property as at some point in the future I will be purchasing further property with the need to re-mortgage this first property to get together a deposit . . . but I have insufficient salary to enable me to get a good mortgage deal, and he has a good salary.

Joint income will be used to assess max mortgage borrowing (subject to status e.g a clean credit record of course)

A_little_lost wrote: »

Is setting up 'tenants in common' a job for the conveyancer, or can I do it myself?

You will be using a conveyencer to conduct the legals for your purchase - advise them that you want the deeds to be held as tenants in common, instead of joint tenants - he will ask you how you want the equity split - job done

Hope this helps

Holly

A_little_lost

Hi Holly

I've slept on it, and now have more questions - sorry!

Does the income share have to mirror exactly the percentage split as per the Tenants In Common agreement? E.g. if the TIC said 70/30 to me, does the rental income (or any future disposal of the property) also have to be split 70/30?

I suppose what I'm getting at is, if the split were 95/5 for example, could I elect to give my partner a greater percentage share of rental income (once he gives up his job and works on this project full time with me) in order to make best use of our personal allowances? Or do we have to re-do a TIC arrangement with a revised split?

At the time of the purchase 100% of the purchase price of the property will have been paid for in cash by me (the capital I want ring-fenced with a deed of trust) but then later the property will be mortgaged to raise deposits for further acquisitions. I'm guessing that initially 30% of nothing will be the amount my partner will get (because the rental income will be generated from the capital I invested). Or am I wrong? Is it 70/30 regardless of the deed of trust?

This whole situation is complicated by the fact that I'm using my inheritance (which I'd like my children to benefit from eventually - after the later of mine or my partner's deaths), we each have 2 children from previous marriages, and my partner has the 'borrowing power' because he has a salary . . .

Oh! and in terms of letting the revenue know about the split, is that simply a case of completing a self-assessment tax form?

Thank you

holly_hobby

Unmarried couple/individuals - HMRC view the individual(s) liable for tax, as those receiving (ie not necessarily on the mge or deeds) or legally entitled to the income - but it does not have to mirror the actual share of ownership depicted under the deeds - whether joint tenants or tenants in common.

Therefore for an unmarried couple, the rental income and its division for income tax purposes, may be on any election you like - with each individual simply paying the appropriate income tax due on their net gain(at their highest rate), as reported via their annual tax return. HMRC did use to ask for evidence of a formal agreement between the parties, but I believe this is no longer a requirement - and simple reporting via annual SA is sufficient.

The complications come where the income is to a married couple/civil partnership arrangement - whereby unless form 17 is used, HMRC will automatically assume a 50/50 share of income between the parties (no matter what the deeds say) - which may not always be the most tax efficient arrangement for them - with guidance on how to mitigate this being discussed in my earlier post on this thread.

Hope this helps

Holly

A_little_lost

It does help, Holly. Thank you very much for your time

Savvy_Sue

Helpme999 wrote: »

Is that right? Can you only do form 17 if you are tenants in common?

I can't say for certain, but it is only if you are tic that you CAN legally hold unequal 'shares' in a house.

Making the change ain't difficult, AFAIK.

holly_hobby

Yes - as discussed, you can only submit Form 17 if you are TIC, with the share holding/division of rental income, detailed in Form 17 mirroring what the TIC arrangment is. (form 17 (link already provided) actually quite clearly states this).

I will say again, Form 17 is ONLY required for Married couples/Individuals in a civil partnership - where you want the rental income to be apportioned unequally for effective tax mitigation purposes.

Hope this helps

Holly

Helpme999

Ok, here is a thick question, if you own the house as joint rather than tenants in common, what is the best way to reduce tax if the husband is the 40% tax payer and wife is basic rate?

Savvy_Sue

Helpme999 wrote: »

Ok, here is a thick question, if you own the house as joint rather than tenants in common, what is the best way to reduce tax if the husband is the 40% tax payer and wife is basic rate?

Change to TIC and make the election with HMRC when you have done this.

I think - but please check this out! - that you would not have to do much more than complete this form from the Land Registry, but you might also need a simple Deed of Trust outlining the amount of interest you each have in the house - see item 10. This might also cover what happens when the house is sold, or if you fall out with each other etc.

I know when my parents changed from JT to TIC (for inheritance purposes), they severed the JT with a letter drawn up by their solicitor.

This is something you need to consider the legal implications of. If you are TIC and your wife 'owns' - say - 90% of the house, even if you've done it for tax reasons, then your wife 'owns' that 90%. She can leave her 90% of that house to the Cats Home in her will, even if it was your money which paid for it and maintained it, and even if you were relying on it for your pension plan.

jgh

dbs wrote: »

The house is in both names, my wife is a non-tax payer so can all the rental income be paid into my wife current account free of income tax

You wife is a non-tax payer because she has no income to be taxed. As soon as she starts receiving income from the rental property, she *will* have income to be taxed.