The legal rules for a couple owning a property can be confusing. Where a property is owned jointly, it may be held under a ‘joint tenancy’ or as ‘tenants in common’. Under a ‘joint tenancy’, each owner has equal rights and obligations so, if one owner dies, their interest in the property passes to the surviving joint owner automatically. If the ownership of the property is not split 50:50, it is likely that the property is owned as ‘tenants in common’, with the desired split of ownership specified.
For married couples or civil partners who own a buy-to-let property, HMRC’s standard policy is to split any rental income on a 50:50 basis. As a result, any rental profits are taxed equally on each spouse or civil partner, unless a separate election is made. This is HMRC’s default position, even if the property is owned as ‘tenants in common’ in different proportions.
Unfortunately, that standard treatment isn’t always good news for the couple from a tax perspective. For example, if one partner has a higher income than the other, it often makes sense for the lower earner to receive more of the rental profits.
There are two reasons for this. It might be that the lower-earner is not fully utilising their personal allowance, or the rate at which they pay tax is lower. Similarly, if one of them is a higher-rate taxpayer and the rental property has a mortgage, they may not be getting full tax relief for the mortgage interest, whereas their spouse or civil partner could be.
It can make sense for married couples and civil partners to review how their buy-to-let property is owned while the current property stamp taxes (SDLT in England and Northern Ireland, LBTT in Scotland or LTT in Wales) holiday is available. If beneficial, they can change the split of ownership. Normally, property stamp taxes can be a barrier to changing the ownership split of a mortgaged property. For most other taxes, exemptions exist which prevent a tax liability arising where assets are transferred between spouses or civil partners, but property stamp taxes can still arise in these circumstances.
Typically, if a property is gifted to someone no property stamp taxes should arise as no consideration is given for the property. However, if a mortgage is attached to the gifted property , tax can be payable if the recipient of the property assume the mortgage liability. Taking on a greater share of the mortgage is treated as consideration for property stamp taxes purposes so, despite no money changing hands, tax can be charged.
The current ‘holiday’ provides a unique opportunity for married couples and civil partners to review their buy-to-let portfolios and change the split of ownership without an adverse tax costs arising, so enabling them to reduce their overall income tax liabilities in future.