Landlords

Splitting rental income with a spouse for tax purposes

Valentina GolubovicValentina Golubovic
Last updated on:
July 10, 2022
Published on:
May 23, 2022

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If you jointly own property with your spouse or civil partner and receive rental income, the default position is that the income is split equally. If you want to change the split of income received for tax purposes, you can use the Income Tax form 17. This is often done for efficiency to minimise the tax liability. To do this, you must prove that the beneficial interest in the property is unequal. 

What is Legal Interest?

Legal ownership or interest in a property is registered at the Land Registry on the title deeds, which also records any mortgages secured on the property. The legal owners will be stated on the mortgage offer as all legal owners are jointly and severally liable for the mortgage. Title deeds for most properties are held electronically. You can contact the land Registry for a copy of your title deeds. If you bought your property before 1/11/1999, or if your property is not registered with the Land Registry, you may have paper title deeds. 

The legal owner has a right of control over the property, meaning they have the right to sell or lease. In England and Wales, a maximum of 4 people may be registered as legal owners, and in many cases, the legal owners will be the same as the “beneficial owners”. In some cases, the beneficial owners may be different or include others, for example, where the property is registered in one name, but multiple individuals fund the purchase and agree the property is owned jointly, or where more than four people jointly own the property.

What is a Beneficial Interest?

Beneficial interest, also known as beneficial ownership, is an interest in the economic benefit of a property. 

Beneficial interest gives the right to:

  • live in the property
  • a share of the rental income
  • a share of the proceeds of sale if the property is sold

Unlike legal ownership, beneficial ownership can be split into equal or unequal shares. To declare the unequal beneficial interest in a jointly owned property, one must provide a Deed or Declaration which legally outlines your beneficial interest shares in the property. 

You can split beneficial ownership to reflect individual contributions toward the purchase price. The two ways in which individuals may hold the benefit in a property are as beneficial joint tenants or tenants in common.

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Joint tenants vs Tenants in common

Joint tenants

As joint tenants (sometimes called ‘beneficial joint tenants’) the beneficial interest is shared equally (50/50). Both parties have equal rights to the whole property. The property automatically goes to the other owner if one dies, and you cannot pass on your ownership of the property in your will. Form 17 is not applicable where the owners of the property are joint tenants. You would have to ‘sever the tenancy’ by filling form SEV to register a Form A restriction if all owners agree.

Tenants in common

As tenants in common, the beneficial interest can be split (for example, 70/30). Furthermore, you can own different shares of the property. The property does not automatically go to the other owners if you die, and you can pass on your share of the property in your will. Where the property is held under a tenancy in common, this will be shown on the Land Registry entry as a Form A restriction. 

Example

If a married couple jointly owns a property as joint tenants, with legal title registered in both names, and receives income on that property, by default, the income will be split 50/50. If the wife is a basic rate taxpayer and the husband is a higher rate taxpayer and their rental income for the year is £10,000, their tax liability will be as follows:

Example income tax calculation for a married couple

The husband and wife may decide to establish an unequal beneficial interest to obtain a tax advantage as tenants in common. For simplicity, if the husband has contributed £30,000 and the wife has contributed £70,000 to the purchase of the house, their contributions would give rise to a beneficial interest for each of them of 30% and 70%, respectively. Their income tax liability would look something like this:

And example of how much income tax a couple will need to pay on rental income

Using form 17 and HMRC's willingness to accept proof of beneficial interest can give a couple an advantage that they wouldn't have otherwise had. Paying less tax is desirable. However, complying with HMRC is essential. Form 17 is insufficient for a property that is not held in unequal shares and income from the commercial letting of furnished holiday accommodation.

The opinions on this page are for general information purposes only and do not constitute legal or financial advice on which you should rely.

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