Personal property income – how is this taxed between co-owners?

Date posted: 28th Apr 2022

As people are taxed individually, property income must be allocated, to each individual, in order to work out the tax that each joint owner is liable to pay.

The ways in which income from jointly-owned property is taxed depends on the relationship between the owners and we will consider the options below.

Joint owners that are not married or in a civil partnership

 Assuming there is no property partnership, where property is jointly-owned by persons who are not married or in a civil partnership, the income arising from the property will normally be allocated in accordance with each person’s share in the property, which can usually be found in the legal documentation when the property was acquired. Each person is then taxed on the income that they receive.

Example 

Andrew, Alison and Anthony are siblings who own a property together which is let out. Andrew owns 50% of the property, Alison owns 30% and Anthony owns the remaining 20%.

The property generates rental income of £10,000. The income is allocated as follows in accordance with the ownership shares:

  • Andrew: £5,000;
  • Alison: £3,000; and
  • Anthony: £2,000.

Each is taxed on the share that they receive.

The joint owners do not have to share profits in accordance with their ownership shares – they can agree a different split. If they do, they are taxed on what they actually receive.

Spouses and civil partners

Where property is owned jointly by spouses and civil partners, the default position is that the income is treated as being allocated 50:50 for tax purposes, regardless of the amounts that they actually receive.

However, this can be detrimental, from a tax planning perspective where spouses or civil partners have different marginal rates of tax or one spouse does not utilise some or all of their personal allowance.

Transferring assets between spouses can usually be done without a tax charge, however, there may be stamp duty / stamp duty land tax issues to consider, hence advice is required to be certain.

Example

Frank is a higher rate taxpayer. He solely owns an unencumbered property generating rental profit of £20,000 a year. He transfers a 50% stake in the property to his wife Francesca, whose only income is a salary of £15,000. Frank and Francesca are each taxed on £10,000 of the rental income. Francesca pays tax at 20% on her share. Had the property remained in Frank’s sole name, he would have paid tax at 40% on the full amount of the rental income. Taking advantage of the rules saves them tax of £2,000 a year.

This rule does not apply to income from furnished holiday lettings.

If Francesca did not work at all, it may be even more advantageous to either transfer more ownership to her, possibly via the completion of a declaration of trust and HMRC form 17. Advice is required, if this is a consideration.

If you have any queries regarding any property tax matters, then please give us a call.


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