Who should own the property?
Before we discuss the tax advantages and disadvantages of who owns a property, a word of caution. Take into account other factors. For example, if one of you were in a high-risk business which could fail, you would want to have the property in your partner’s name so that the asset is protected should the business cause you to be declared bankrupt. Changing the ownership has to be carried out legally and could incur additional costs. Please see our article “Types of ownership”.
If you are thinking of buying a property and it does not matter who owns the property, then it is better to consider each of your tax situations and then decide the ownership. If you are a higher rate taxpayer and your partner has no other income, it is more advantageous from an Income Tax point of view to put the property into the name of the partner who has no income.
Finace costs are restricted to 20% relief only which increases the tax payable for higher rate taxpayers where there is a mortgage. However from a Capital Gains Tax point of view, it may be advantageous to have the property in joint names depending on whether either partner has other gains in the year of disposal. Assuming there are no other gains, then two annual exemptions are available which could save up to £3,444 in Capital Gains Tax in 2020/21 to 2025/26. However the saving may not be as much as one partner may pay a higher rate of Capital Gains Tax than the other partner depending on each partners level of income. The position of married and unmarried couples is different, so we shall discuss each separately.
Married Couples and Civil Partners
Income from jointly owned properties is treated as received in equal shares unless an election is made to treat the income as split in the proportion of beneficial ownership. The election must be made to HMRC within 60 days of the change, you must be entitled to the income in unequal shares and you must elect in the proportion of the beneficial interest. You cannot simply choose to have the income split on an unequal basis because it may be tax efficient. There are different rules if it is a business partnership (see below).
However, you can make the equal split work to your advantage shown by the following example:
Joseph is a married man who is a higher rate taxpayer. His wife, Sharon has no income. Joseph owns a property and he receives all the rental income. He, naturally, wants to reduce his tax liability but retain his income and capital. He decides to transfer 1% of his property to Sharon. Joe instructed a solicitor to make the transfer so Joe owned 99% and Sharon 1%.
Joseph and Sharon then received the income in this proportion. They could elect for the income to be taxed in this proportion. However, if no election is made, the income is taxed 50% on Joseph and 50% on Sharon. There will, therefore, be a tax saving of up to 40% on half of the income. But Sharon may not be happy with a tax liability on 50% of the income (assuming it produces a liability) when she is only receiving 1%! Joseph would probably need to compensate Sharon for any tax liability that arises. Joseph also needs to bear in mind that Sharon could prevent a sale even though she only owns 1%!
Capital Gains Tax
If one or both of you own a property, you may wish to review the way in which you own it. As a married couple, you can transfer a property into joint names or sole names without a Capital Gains Tax liability. You may wish to transfer a property in the sole name of one spouse into joint names just before you sell the property to take advantage of the two annual Capital Gains Tax exemptions, as mentioned above. If one of you have lived in the property in the past, then care needs to be taken as principal private residence relief may not be available to the other partner so there could be a significant increase in the tax payable overall. The rule has changed on the 6th April 2020 whereby the transferee spouse takes over the use of the property from the transferor spouse.
Care does need to be taken because if you do the transfer in anticipation of a sale, HMRC may attack the transfer under the anti-avoidance rules. You would also need to ensure that any income received after the transfer is divided equally (or in the relevant proportion if an election is made).
If you gift an asset to any other person apart from your spouse (for example your child) then there will be a Capital Gains Tax implication and you need to read the paragraph below under Unmarried couples and other non-business relationships.
Unmarried couples and other non-business relationships
The rental income is assessed on the basis of the entitlement or receipt of the income. Normally receipt and entitlement are the same thing. However, you may choose to have all the income paid to one partner so that there is a tax saving. You would need to ensure that the relevant partner actually received the income into his/her sole bank account, declared it on his/her tax return and we would recommend that there is an agreement in writing. This could not be done in the case of a married couple. The example of Joseph and Sharon above does not apply to unmarried couples.
There are different rules if it is a business partnership (see below).
Capital Gains Tax
Unlike married couples, Capital Gains Tax is an issue if you transfer properties to another person. It will be treated as a transaction at undervalue and there could be a Capital Gains Tax liability. You, therefore, need to do the calculation before you transfer any properties. If there is any tax to pay then a return must be made and the tax paid to HMRC within 30 days of the completion of the sale in the case of residential property for UK residents and for all properties whether there is tax to pay or not for non residents.
The gain is calculated by deducting the original cost and enhancement expenditure from the market value at the date of transfer. If this creates a capital loss and the person is connected with you, you could find that you may not be able to use the loss against a gain on the remaining share of the property (or any other asset) in the future – a double whammy!
Tip: There is no Capital Gains Tax on death, so if you have an asset which has a capital gain and you are not likely to survive for seven years, do not gift the asset before you die, otherwise there will be a potential Capital Gains Tax liability as well as an Inheritance Tax liability. See article Summary of Inheritance Tax
Normally, jointly owned properties are not treated as a partnership. However, if you provide services as well as letting out the property or you carry on another business and property is let out as part of that business e.g. a farming partnership which lets out some of the farmhouses to tenants, then the income will be returned on the partnership income tax return.
Normally, the income from the property will be included in the business accounts and the accounting date may not end on 5th April. The rental income will usually split in the same way as the partnership profits and is included as part of your partnership income rather than income from property on your individual self-assessment tax return.
If you also hold properties in a different capacity, your share of the losses from the partnership properties cannot be set against your property income and vice versa.
Commercial properties can be held in a pension scheme but residential properties cannot be held by a pension scheme.
It is possible to operate a business from premises owned by your pension scheme. The rent and pension contributions paid by your limited company are normally allowed for corporation tax purposes. The the rent and pension contributions roll up tax-free and can be used to pay you a pension after you reach the age of 55.
There are specific rules and independent advice needs to be sought before you set up a self-administered pension scheme.
The profits and capital gains from a property are liable to corporation tax and there may be an additional liability if you distribute the income to yourself. Please see our article “Is it worth having a limited company?”
It is possible to hold property in trust. Trusts are assessed to income tax on property income either at the basic rate (currently 20%) or the trust rate (currently 45%) and capital gains over the exemption (which is usually one half of the individual exemption) are taxed at 28% for residential properties or 20% for other gains.
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S S Thandi and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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