The end of another tax is a timely reminder to all those couples who are married or in a civil partnership to consider which of you should continue to receive the income from rental property. This article outlines the options available.
If your circumstances have changed and one of you is or has become a lower or basic rate tax payer, it may be worth reviewing who is to receive future rental income for tax purposes and altering the beneficial ownership of the properties concerned to reflect this. What is required to achieve a change in beneficial interests will depend upon whether only one or both of you are named on the legal title to the property.
Declaration of trust and why you need evidence
If you want to change the way in which rental income is allocated between you, you will both need to sign what’s called a ‘declaration of trust’ in respect of each property. In the past HMRC only asked for evidence of a change in beneficial ownership in the case of bank and building society interest. This requirement now applies in respect of all types of property.
A declaration of trust is a simple form of trust deed, which states that although the legal title is owned by one or both of you, the beneficial interests (i.e. the right to receive income) are held by the party wishing to declare the income on their tax return. Therefore, whilst HM Land Registry might show the legal title to the property as being in your joint names, the declaration of trust sits behind the legal title, providing evidence of the way in which the actual benefit is apportioned and rental income paid between you.
The declaration of trust can be amended later in the event of a change in circumstances, so that the beneficial interests are again held equally, or otherwise. This might also be relevant if you later want to sell the property and use both your annual allowances for capital gains tax purposes. Provided you are married, or in civil partnership a change to the beneficial interests in property will be treated an exempt transfer for inheritance tax purposes and at no gain/no loss for capital gains tax, so no tax liability will arise. However, any change only takes effect from the date of the declaration of trust and cannot be written back to the start of the tax year in question. It is, therefore, important to complete the declaration of trust before 6 April in any given tax year if you want the change to apply to the full years rental income.
Sole legal owner
The legal title might be in the sole name of one of you. This is quite usual if the property is mortgaged, if one of you is a higher earner, or perhaps it was owned and occupied by one of you before you met. It is still possible to declare rental income as belonging to your partner, so as to make use of their personal allowance and marginal tax rates. The declaration of trust should be signed by both of you and will state that although the legal title is in one partner’s name, they hold the net equity in the property for the benefit of the other partner in whatever shares are agreed.
Joint legal owners
If the legal title to rental property is in your joint names HMRC will normally treat the rental income as if it belonged to you equally and tax your both accordingly. If you want to redistribute the income so that one of you receives a greater share HMRC will again require evidence, in the form of a declaration of trust, to show that your beneficial interests in the net equity of the property reflect the way in which the income is being shared between you.
HMRC Form 17
Where the legal title to the property is held in your joint names, but not if the title is in the sole name of one of you, you must also complete HMRC Form 17 (Declaration of beneficial interests in joint property and income). The Form 17, together with a certified copy of the declaration of trust, must be submitted to HMRC within 60 days of the date of the declaration of trust. Failure to do so will mean that HMRC will continue to regard the rental income as having been received by you jointly and will tax it accordingly. If there is a subsequent change of beneficial interests and a redistribution of income between you then a further Form 17 and a certified copy of any new declaration of trust must again be submitted to HMRC within 60 days of the change.
Where rental property is mortgaged further advice may be necessary. Not only is a transfer of the mortgage of interest likely to breach the terms of the mortgage with the lender, but being a transfer of an interest in land it could also trigger an Stamp Duty Land Tax liability if the sum outstanding is more than £125,000.
Before transferring assets both of you should also receive appropriate legal advice on the non-tax effects of transferring the beneficial interests in property between yourselves. In particular you may need to review your Wills and consider what would happen to the properties if one of you died. You should also be aware of the implications for your respective estates and any financial settlement if you subsequently divorced or separated.