Rental income and married couples: how does it work?

If you own a buy-to-let property, you may have heard that you could cut your tax bill if you are married. This can be true, because it’s possible to use a spouse’s unused tax free personal tax allowance or some of their basic rate tax band if it has not already been fully covered.

If you want to make your property portfolio as tax efficient as possible however, you need to take a close look at how your properties are owned. In this post, we look at how different ownership structures can affect rental income and married couples. As you’ll see, some methods of ownership can be more profitable than others!

Jointly owned property – joint tenancy or tenants in common?

For the purposes of this post, we’re going to assume you already own a rental property. However, if you are thinking of buying a property, it’s wise to consider the various ownership structures before you sign on the dotted line. We can advise you on this. We can also make sure your ownership is tax efficient from the outset.

If you want to make use of a spouse’s Income Tax personal allowance, you need to jointly own the properties in your portfolio. This means that if the property is not already held in joint names then that will need to be addressed first. If the property is mortgaged then the spouse will also need to be added to the mortgage.

Unless you tell HMRC otherwise (we’ll come to this in a moment), the taxman will assume you and your spouse are ‘joint tenants’. This means that, for tax purposes, any rental income will be split 50/50. In addition, if one spouse dies, the whole property will automatically be transferred to the surviving partner.

This suits many couples. However, there are a few potential drawbacks. In particular:

• Even if one partner has put in more than 50% of the capital, their portion of the rental income is fixed at 50% for tax purposes.
• You can’t tweak the proportion of income to make ownership more tax efficient.

The second point can make a significant difference to your tax liabilities. For example, a couple may want to adjust their rental income share to (say) 30% / 70%. They would normally want to do that:

1. To stop one spouse’s income straying into the higher rate bands (40% or 45%) for Income Tax or better still….
2. To make use of the other partner’s unused (or partly used) tax free personal allowance.

Is it possible to adjust the split of rental income for married couples?

Yes, it is possible to adjust the proportion of rental income received by each spouse. To do this, you need to register the property as ‘tenants in common’. This can be complex. First you need to sever your joint tenancy (if you already own the property and are joint tenants). Then you need to declare beneficial interests in joint property and income using HMRC’s Form 17.

By doing this, a share of the property and its rental income can be apportioned to each partner. As in the example above, you might want to split the taxable income 30% / 70%.

While this can give you the income tax advantages we’ve already covered, there are things you need to bear in mind before opting for a ‘tenancy in common’. Specifically:

• Either spouse could theoretically decide to sell their share of the property, causing an issue to the other spouse
• There can be Inheritance Tax implications – each person’s share becomes part of their individual IHT estate
• Changing ownership structure may affect your mortgage – this change would need to be approved by your lender
• Switching to a tenancy in common could have Stamp Duty Land Tax complications – HMRC may charge Stamp Duty on the ‘consideration’ given. You can learn more about SDLT and property transfers here. As you’ll see, it’s a hugely complex topic, although we regularly advise our clients on how it works.

As you can see, while choosing a tenancy in common can generate tax savings, it can also create tax complications! That’s why we strongly recommend you talk to one of our Buy-to-Let experts before making any change. We can help you understand the implications of everything from Inheritance Tax to SDLT. What works for one couple won’t necessarily work for another!

Coming up next

We hope you’ve found this piece on rental income and married couples helpful. You may be wondering how joint ownership works using a limited company structure, or if the two parties aren’t married. In the next blog in this series, we’ll cover both points – and show you how to decide on the best structure for your own buy to let portfolio.