Tax on rental income - different rate tax payers

robbie1980

Hi All,

Had some conflicting advice and would like your opinions and/or direction to seek clarity.

I bought a house in 2005 on my own and lived there until June 2012. My partner also lived there with me during this time, but the deeds are 100% in my name.

We have bought a new house in June 2012 jointly and are renting my house out. I have 'permission to let' from my lender and the rental income from my property is being paid into our joint account as this is genuinely being used by both of us.

I am a 40% tax payer and my partner 20%. The total annual rental income will be £6900 which if my partner could pay tax on - would still be at the lower tax rate.

Is it OK for her to fill in the self assessment tax form and pay tax, do we have to split it 50/50 between the two rates or do I have to pay it all at 40%?

The solicitor dealing with our joint house purchase mentioned a term (something in trust) which he said an accountant could complete which would allow us to take advantage of my partners lower tax rate allowance.

A relatively inexperienced friend studying accountancy has asked questions at his work which led him to believe I would have to pay tax on the full amount at the higher rate.

Obviously, one solution would be to put my partner on the deeds of my house - even then would she be able to use all her lower rate tax allowance?

Some direction would be appreciated, or where I can seek clarity.
Thanks
Rob

ceeforcat

You own 100% of the house and are entitled to receive 100% of the income - you pay 100% of the tax. It is irrelevant as to whose bank account the money is lodged.

Of course you can put the property in joint names and your partner would indeed pay lower rate tax on her half of the income. However, as you are not married, you would have disposed of half of the house and a capital gain will arise. However this would be certainly covered by main residence relief.

robbie1980

Thanks for the reply - your first point is understood - just strange what my solicitor mentioned....

I looked at capital gains and due to being in the property for over 6 years, the 3 year rule and personal allowance, we wouldn't be affected even if the property doubled in value in a short period of time.

When you say a capital gain will arise - I assume you mean my partner getting half a house? If so, would she have to notify this on a return or is it something done automatically?

Finally, if my house was put in joint names you say we could pay tax on half the income at our respective rates, is it possible to put say 90% of my property in her name to take advantage more of her lower rate allowance and myself only pay tax on 10% of £6900 at 40% rate?
Thanks

pjclar02

Hello Robbie

I suspect your solicitor is referring to a declaration of trust which, if your partner was on the deeds, would enable you to divide the beneficial interest in the income and capital as you see fit - irrespective of the legal ownership.

If you lived in the property until June 2012 as your only or main residence then no liability to capital gains tax will arise on the disposal of part of the property to your partner.

Therefore you can transfer 50% ownership of the legal title to your partner, and I would suggest drawing up a declaration of trust to split the beneficial interest to the income and capital 99% to your partner and 1% to you. This ensures you maintain your entitlement to an element of private residence relief on the second half of the property when you come to sell it.

You will then need to submit Form 17 to HMRC notifying them of the change in beneficial entitlement.

It's a fairly complex area and worth taking some specific advice before proceeding.

Hope this helps.

robbie1980

Many thanks for your post.

So a solicitor will deal with the transfer of deeds to include my partner as joint owner. Will they also have to arrange a declaration of trust or is this something an accountant would arrange - or do myself?

Should the advice i seek be from an accountant or solicitor?

Sorry about all the questions, but I assume we would both have to fill in a tax self assessment form or does the form 17 you mention negate this?
Rob

pjclar02

You will need a solicitor to register the change in title, and I would recommend the solicitor also draws up the declaration of trust.

You may find that the solicitor will not prepare and file form 17, but you can do this yourself, or appoint an accountant if you are not comfortable.

Form 17 is distinct from self-assessment, so you then need to determine whether either or both of you need to register for self-assessment and submit returns. Broadly, if your rental property is profitable and there is tax to pay, then I would recommend registering for self-assessment to ensure your tax is paid correctly.

robbie1980

There will be a small profit made due to low interest rate on rental property.

In theory I would have to fill in a SA for 1% (or whatever is agreed in the declaration) and my partner for 99% of the tax payable of on the rental income after usual deductions?

Sorry if they seem simple questions.Your help is appreciated. I will seek further advice as you suggest.

xylophone

The Form 17 refers to "spouse or civil partner" - OP has not indicated status of partnership?
http://www.hmrc.gov.uk/forms/form17.pdf

jimmo

No need for all that.

A couple who are not married and not in a civil partnership can split the income from jointly owned property any way they wish.

See “
Jointly owned property - no partnership”

In this link.

http://www.hmrc.gov.uk/manuals/pimmanual/PIM1030.htm

robbie1980

OP?

We are not married but partners for 7 years and expecting a child in September

xylophone

OP?

We are not married but partners for 7 years and expecting a child in September

OP = Original Poster.

If you are unmarried, possible IHT considerations on gift of half property?