Rental Income Splits – What You Need to Know

If you have property you let out, you need to know about rental income splits and how HMRC views them.

The law has been settled on rental income splits for a little while now for married couples and civil partners who live together. But what are these rules? Smart Team takes a closer look.

 

How income is split

Assuming the property is owned on an equal basis, income from the property must be split and taxed in equal shares.

However, if you and your spouse or civil partner own the property but one has a bigger share than the other, you need to provide proof to HMRC that this is the case as HMRC’s assumption is a 50/50 income split unless they’re told otherwise. If you need to notify the taxman, download and fill in Form 17.

For example, let’s say that Mr and Mrs Green own a property. Mrs Green has a 75% share and Mr Green a 25% share. Their rental income is £10,000 a year.

Without filling in form 17, both Mr and Mrs Green would be taxed on £5,000.

When they download, complete, and send off Form 17 and HMRC accept their evidence, Mrs Green will now pay tax on £7,500 and Mr Green £2,500.

 

If only one of you is the sole legal owner, what happens?

HMRC allow you to declare rental income as belonging to your spouse or civil partner, even if they’re not on the deeds. If you do this, you’ll benefit by potentially making more beneficial use of both your individual allowance and marginal tax rates.

To declare your rental income as belonging to your spouse or civil partner, you need to use Form 17, mentioned above.

Both of you will need to sign the declaration of trust and in it state that even though the legal title is in the name of one partner, they hold the net equity in the property for the benefit of their spouse or civil partner howsoever you decide to split the income.

 

Beware stamp duty land tax

When completing Form 17, be careful to make sure that only the net equity in the property is transferred to your spouse or civil partner. If you try to transfer part of the actual value of the house, a transfer of this size may trigger stamp duty and you may inadvertently breach the terms of your mortgage agreement.

 

Are there inheritance tax or capital gains tax implications?

Provided that you and your spouse or civil partner are together at the time of a net equity transfer, this will be exempt for the purposes of inheritance tax. It will also be treated as a no gain/no loss transaction so no capital gains tax liability should arise.

 

Here to help

If you have property and you want advice on how to deal with all aspects of rental income and rental income splits, please do give us a call on 01202 577500 or email us at [email protected].

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