What are the tax benefits of splitting property income between co-owners?

If your property is jointly owned by two or more people, there can be tax advantages to splitting any profits you make between you and your co-owner/s.
Splitting the profits helps you distribute the profits in a way that favours any co-owners with a lower marginal tax rate – whether that be your wife, husband, civil partner or business partner.

What are the rules around splitting your property profits?

One of the most common forms of co-ownership is between married couples or people in a civil partnership, where you and your partner have jointly bought the property.
For a married couple, or a couple in a civil partnership, it is initially presumed that the profit from your jointly-owned property will be split equally. But this 50/50 split may not always be ideal, particularly where one person has a lower tax rate than the other.

So, what happens if a 50/50 split isn’t right for your situation?

• If the legal ownership is different, you can make an application to HMRC using ‘Form 17’. This form is used to request that any profits are taxed in the same proportion as ownership of the property.

• Although there are other considerations besides tax, ownership of the property can be varied by one party transferring a share of ownership to the other without any capital gains considerations, (as long as transferor and transferee are spouses or in a civil partnership). Care should be taken, however, to assess whether the transfer gives rise to any stamp duty land tax implications.

• The 50/50 split does not apply where the couple are operating a UK property business which consists of the commercial letting of furnished holiday accommodation. Here the profit can be split as agreed by the parties.

• If the property is jointly owned by people who aren’t married or in a civil partnership (siblings or friends, for example), the default is to split the income for tax purposes in the same proportion as ownership of the property.

• If you want to split the profits in any other way, you’re free to do so – there are no restrictions to stop this. But, if you do, it would be wise to have a written contract or agreement recording the desired split. Make sure to also split the profits in the same proportion that you declare to HMRC.

• Another way to vary any profit split is to operate through a partnership. The partnership profit can be split in any proportion that the partners agree, and does not have to be related to capital contributions or anything else.

• However, for this approach to work, there must be a genuine business being carried on. Just owning a property and receiving rental income wouldn’t be enough – there have to be significant additional services being provided for payment.

Talk to us about how to split your profits

As with any business profits, there can be an overall tax saving from arranging for profits to be allocated in a beneficial way. But there are restrictions in the way that the income is split.
HB&O can guide you through the various options available when splitting profits from property rentals. We will also advise you on any capital gains issues that could arise as these need to be carefully thought through and planned for.

Get in touch with our Associate Tax Director, Neil Allcroft, for specialist advice.

Email: [email protected]

Phone: 01926 422292