Recently we published our first article about rental income and spouses. It looked at ways of potentially cutting your tax bill. So, if you want to know about the benefits and drawbacks of holding property as ‘joint tenants’ or ‘tenants in common’, or how to adjust the split of rental income between married couples, please read that article first.
In today’s blog post, we’re going to look at two other situations couples may find themselves in. Firstly, what happens if joint owners are unmarried. Secondly, what happens if spouses own property via a limited company.
Property jointly owned by unmarried partners
If you are not married or in a civil partnership, you’ll be taxed in a similar way to married couples. However, there is one main difference: you can’t as easily make use of one partner’s unused personal tax allowance.
In a nutshell, if you own property as ‘joint tenants’ you’ll pay 50% tax each on the rental income. (HMRC will assume you are joint tenants unless you tell them otherwise).
On the other hand, if you register the property with HMRC as ‘tenants in common’, you can tell the taxman what proportion of the asset each partner owns. For example, you could apportion the property’s ownership as a 70% / 30% split. In such a case, one partner would pay 70% of the tax on the rental income and the other would pay 30%.
That said, you need to be aware that registering as ‘tenants in common’ can have implications for Inheritance Tax, your mortgage and Stamp Duty Land Tax. Also, one partner could theoretically sell their share of the property, causing problems for the other person. For more details on these potential consequences, please see the first post in this series.
Property indirectly owned by spouses
Many of our landlord clients come to us for advice on whether they should hold their properties indirectly, such as via a partnership or a limited company. Whether or not this is a good option for you depends on a wide range of factors. We will cover these in more detail in future posts, for both partnerships and limited companies. However, if you are thinking of moving your portfolio to a limited company and you are a current THP Tax Return client, we recommend talking to one of our buy-to-let tax specialists for advice..
However, if you already hold property via a limited company, for example, the way each spouse or partner will be taxed depends on a number of variables. These include:
- Company profits
- Company dividends
- Salaries paid out by the company
One big advantage of a limited company is that it’s relatively easy to apportion different levels of income to each spouse or partner. You can adjust this to get the maximum benefit from either partner’s unused Income Tax personal allowance.
In addition, if one partner spends time working on the business, they can draw a salary. This can be a very tax efficient way of making use of a partner’s personal allowance.
Finally, you may enjoy other benefits if you own property via a limited company, such as remortgage interest relief.
Rental income and spouses: a summary
If you are married, there’s a variety of different ways you can structure your rental portfolio. Each has its advantages and disadvantages, which we’ve covered for you.
Whether you own property as ‘joint tenants’, ‘tenants in common’ or via a limited company or partnership, it’s important to remember that taxation and reliefs change regularly (as we’ve seen over the last few years). For that reason, it’s important to review the way in which you hold your joint portfolio on a regular basis. THP is happy to give advice to our current Tax Return clients. So if we are already responsible for preparing your annual self assessment tax return, please drop us a line today.
About Ian Henman
London lad Ian joined THP in October 2016 to set up and manage THP’s new legal services department.
Starting at the tender age of 19 Ian spent almost 30 years building his career at Natwest/RBS becoming a business client account manager to many local businesses.
Ian was looking for a new challenge and as THP was searching for someone to gain accreditations and spearhead the legal services department, there was a clear synergy.