HMRC is currently paying close attention to how rental income is divided between spouses. Nottingham chartered accountants Clayton & Brewill explains the importance of ensuring the right ownership status for rental properties to avoid falling foul of HMRC.
The general rule is that, where rents are received from an asset held in the names of individuals who are married to each other and living together, the income is shared equally.
This rule often works very well for many married couples. Even if the wife has contributed 90% of the capital to purchase the property, the husband is deemed – for tax purposes – to receive half of the income.
However what if you want to allocate more share of the income to the spouse with little other income?
You can change this default position provided that you:
* make a joint declaration as a couple, and
* are ‘beneficially entitled’ to unequal shares in the property.
The joint declaration is made on a form (Form 17 – Declaration of beneficial interests in joint property and income) and requires evidence to support the declaration that beneficial interests in the property are unequal, for example a declaration or deed.
Here’s where many couples get into difficulty, as the property will often be owned by married couples as ‘joint tenants’. This means that the split is 50/50 and it will remain so even if a declaration is submitted.
Instead, you need to change the ownership of the property from a joint tenancy into ‘tenants in common’.
This then allows you to set out the entitlement to unequal shares in the property and will ensure you can vary how the income is allocated between the two of you.