Sharing property income in a tax efficient way

Q. My wife and I are planning to purchase a property to rent out but, as my wife earns considerably more than me, I’m concerned that she will pay a lot of higher rate tax on the rents we will receive. Have you any suggestions for improving the position?

A. On the face of it, this should be a simple thing to solve as like many things, the allocation of income between husband and wife or civil partners is a common area allowing some simple planning but, as with all things tax, there are rules for the unwary.

Unlike say a business trading partnership between a husband and wife or, between civil partners, where a simple  written agreement can be used to split profits efficiently e.g. a higher percentage of profits being allocated to the lower tax rate paying individual, there are different rules for property income.

The tax laws on this have not changed for many years. Normally where rents are received from a jointly-owned property, then the income is, by default, split 50/50 under the rules.

However, it is possible to arrange matters and vary this treatment providing appropriate steps are taken:

First, a special joint election needs to be made to H M Revenue and Customs on a Form provided by them; and:

Second, the property owners must be beneficially entitled to unequal shares of the rental income.

Not surprisingly, the Form requires you to prove the second point.

You need to be aware that if the property is owned as joint tenants (which is how the majority of jointly owned properties are held), then the split is automatically 50/50.

However property can be owned in unequal shares as ‘tenantsin-common’. This type of ownership usually means that at the time you purchase the property you would purchase it as ‘tenants-in-common’ and the legal paperwork needs to reflect this. This type of property ownership would also need to be shown on the Land Registry documents. In addition you would also need to be able to demonstrate the unequal shares of the property that each of you own.

It appears that H M Revenue and Customs are paying closer attention at the moment as to how rental income is divided between husband and wife or civil partners on their Tax Returns, so as with all things tax, it does make sense to take proper advice.