Do you jointly own a rental property with a spouse and currently declare the income from that property 50:50 on your Tax Returns? What would happen if one of you changes tax brackets and becomes a higher-rate tax payer? Is it possible for the basic tax-paying spouse to be taxed on a larger share of the rental income?
In general, married couples, couples in a civil partnership or those living together and jointly own a rental income property are entitled to a 50:50 split of the income. The rule from which this applies is found in Section 836 of the Income Tax Act 2007 (ITA2007) where it states that this applies where:1) if income is obtained through property held in the names of those who:
(a) are married to, or in a civil partnership with each other and
(b) who live together.
2) Both individuals will be entitled to the income from rental property in equal shares for income tax purposes.
There are some exceptions to this rule, such as that of furnished holiday accommodation, and partnership income. Making the assumption that the property involved is not a furnished holiday letting, however, these exceptions are unlikely to apply here.
What you can do though, is create a Declaration of Trust on the property, this would allow the higher tax-paying spouse to relinquish a proportion of ownership and allow the basic rate tax-paying spouse to own a greater share on which they would be taxed accordingly on the income. It should be noted that the rule from S836 ITA2007 would still apply, so you would also have to ensure that a declaration under the said rule would override the deeming rule. This can be done using Form 17 which can be found at:
This declaration would only come into force on income created on or after the date noted, providing that the Form 17 is filed with HMRC within 60 days of the declaration date. At this point, it is necessary to provide evidence to HMRC of the beneficial interest in the property. If the declaration is valid, it will remain in place until such time as the interest on either the income or the capital of the property fall out of line with the declaration. It is vital to acknowledge that you must have the Declaration of Trust in place first before you can use Form 17 to elect this change under S836.
As far as Capital Gains Tax is concerned, when transferring a proportion of ownership of a property to your spouse, it would be considered under S58 of Taxation of Chargeable Gains Act 1992 to be a no gain/loss transfer, so there would be no CGT payable. It would be prudent to note, however, that when it comes to CGT, should the property be sold, the proceeds would be split and CGT liable in the ration of the current beneficial ownership in effect at the time of sale.
It should also be noted that, depending on whereabouts in the UK the property is, there is no spousal exemption for Stamp Duty Land Tax (SDLT), Land and Buildings Transaction Tax (LBTT) or Land Transaction Tax (LTT). It will be assumed that there has been no direct payment for a change in the beneficial ownership, should there have been a change to a current mortgage debt then these would be taken into account. As the property is already held in joint names, it is being assumed that the mortgage will already be in place and also in joint names, but before any steps are taken to change the proportion of ownership, and to ensure that no unforeseen consequences come your way, all of these rules need to be considered and checked in detail.