QUESTION: I have heard that you can split the ownership of a property which is jointly owned and save tax. Is this right?
ANSWER: The renting out of property by individuals produces rental income which is subject to income tax on the part of the beneficial owner of the property (less relevant tax deductible expenses e.g. management fees; repairs; maintenance and loan interest etc). The highest rate of income tax for the current tax year is 45 per cent.
In certain circumstances, it is possible to vary the ownership of a property which can improve the tax position for the property owners. There are a number of ways that property can be held.
Sole ownership is where a property is owned in one individual’s name and the income and capital gains are chargeable on that individual. Income and gains cannot be shared with a spouse or civil partner for tax purposes.
Joint ownership (or joint tenants) is where the whole property is owned jointly and if one of the joint owners dies then the property automatically transfers to the remaining owners.
The interest in a jointly owned property cannot be left in a will until the last survivor becomes sole owner. Because the individuals are entitled to an equal share in the whole of the income and capital gains, they are shared equally and no election can be made for a different split of income.
Common ownership (tenants in common) is where effectively a proportion of the property is owned by an individual. This may be equal or it may be in different proportions. If one of the tenants dies then his/her share goes into their estate and is dealt with by the will or according to the rules of intestacy.
If the property is owned in different shares and the owners are not married/civil partners then the income and gains are divided in proportion to the ownership. In the case of married couples/civil partners, the income is treated as shared equally (whatever the beneficial ownership) unless they both make a declaration confirming the actual split of income based on the beneficial ownership of the income. The gain would follow the beneficial ownership.
Where a property is owned jointly by spouses, each spouse is subject to income tax on 50 per cent of the rental profit irrespective of the respective percentage ownership of the property by each spouse.
Thus, for example, if one spouse owns 80 per cent and the other spouse owns 20 per cent of the property any rental profit is still treated as arising to each spouse as to 50/50 for income tax purposes.
If each spouse is liable to income tax at the same marginal rate, the 50/50 split is acceptable for tax purposes. However if, for example, one spouse is liable at the 45 per cent marginal rate and the other spouse has no taxable income, it is income tax inefficient for the rental profit to be split 50/50.
In this scenario it would be more tax-efficient if, say, 99% of the rental income was subject to income tax on the part of the spouse who has no other taxable income.
This is achievable, but it requires that the underlying ownership of the property is in line with the rental profit split i.e. 99 per cent/1 per cent. It is also necessary for Form 17 ‘Declaration of beneficial interest in joint property and income’ to be filed with HMRC.
In the event that the form is not so filed (even if the ownership percentages are 99%/1%) the rental profit is split 50/50 for income tax purposes.
If one spouse owns a property in their own name, it would be an idea to transfer the property into joint names before a sale assuming that the other spouse has not already used their CGT exemption in the tax year concerned.
Care does need to be taken as if this is carried out shortly before a sale, then HM Revenue and Customs may attack the transaction as invalid under anti-avoidance rules. You also need to ensure that any income received in the period after transfer of the property is declared on each spouse’s tax return which may increase the income tax paid. There would also be the costs of conveying the property into joint names.
:: Paddy Harty (p.harty@pkffpm.com) is director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
