Many of our clients invest jointly in buy to let properties to generate rental income. Sometimes it makes sense to be allocate more of the rental income to the other half because they are non-tax payers or are paying tax at the lower rates. However, this is not how the rules work.
Under the legislation, if income arises from property held in the names of individuals:
- who are married to, or civil partners of, each other; and
- who live together,
they are treated as beneficially entitled to the income in equal shares for income tax purposes (even if, the property is actually owned in unequal shares). This only applies on income arising from property that is jointly owned by married couples and civil partners, but not for the property owned jointly by unmarried couples.
Mr P and Mrs P own a property which they let out. Mrs P has 80% share of the property and Mr P 20%. The rental income from the property is £10,000 a year. Mrs P is a basic rate taxpayer and pays tax at 20%. Mr P pays tax at the higher rate of 40%.
The couple were unaware of the rule and assumed that Mrs P would be taxed on 80% of the income (£8,000) and Mr P on 20% (£2,000), with Mrs P suffering a tax bill of £1,600 and Mr P a tax bill of £800– a combined tax bill of £2,400.
As the couple have not made a Form 17 declaration, they are each taxed on rental income of £5,000 in equal share. As a result, Mrs P has a tax bill of £1,000 and Mr P has a tax bill of £2,000 – a combined tax bill of £3,000, which is £600 more than they were expecting.
HMRC may open an enquiry in relation to incorrect filling and potential penalty and interest will be charge on the tax that is owed to HMRC!
What can we do?
The individuals can consider making a joint election by using Form 17. This Form applies:
- one of them is beneficially entitled to the income to the exclusion of the other; or
- they are beneficially entitled to the income in uneven shares,
and their beneficial interests in the income correspond to their beneficial interests in the property from which it arises.
The declaration must be made within 60 days from the date on which it first is to have effect and applies only in relation to income arising on or after the date of the declaration.
Once a declaration is made, it remains in place until there is a change in either income to which the declaration relates to the property from which that income arises.