Spouses often hold rental property jointly, and where this is the case, rental profits and losses are treated as arising to them in equal shares.
If one spouse pays tax at a higher rate than the other it may both desirable and possible to improve the ‘family’ tax position by means of the spouse who pays tax at a higher marginal rate transferring part of his/her share in the property to the other.
However, you must be very careful to properly effect the legal changes that are required before you apportion income anything in any way other than 50:50 – i.e, you cannot simply split the profit in the way that minimises your tax liability unless that split reflects the underlying beneficial ownership and income entitlements.
Even once the legal changes are made, tax rules still split the income 50:50 until both individuals ask their respective tax offices for their share of profits and losses to match the share each now holds in the property. This is normally done using the form 17 procedure, which has effect in relation to income arising on or after the date of the declaration, and continues to have effect until such time (if any) as there is a change in the beneficial interests of the individuals in the property covered by the declaration.
If individual circumstances allow, it may be simpler to charge the rental business for the work carried out by one spouse, thus reducing rental profits and redistributing the overall profit shares. This has the added benefit of turning some of the rental profits into ‘relevant earnings’ for pension purposes, and pensions have greatly enhanced benefits since recent changes in the legislation, not least in the very significant tax benefits they offer.
Sutton McGrath Hartley are chartered tax advisers based in South Yorkshire and North Derbyshire. If you need any advice or further guidance on property taxation, get in touch with one of our experts on 0114 266 4432 or email us at [email protected]