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Is tax different as a joint property owner?

So, you want to buy a buy-to-let property. In most cases, this means that you’ll have to file a tax return on the income that you get from renting it out – but what does it mean if you buy the property jointly with someone else?

It’s a common question, and one you should know the answer to if you’re looking to invest. 

Keep reading for the ins and outs of how tax works for joint property owners.

We live in the rental property

If you live in the property you own and you only rent out a room or space within the house, you’re covered by the Rent-a-Room scheme. It lets you earn up to £7,500 tax-free rental income per year. 

Depending on where you live in the UK, this can be a big money saver. 

You can use the Rent-a-Room scheme if you’re:

  • Resident landlords (you live in the property)
  • Running a Bed and Breakfast, Guest house or Airbnb
  • Renting a furnished room/space in your house

Be aware though that the Rent-a-Room scheme applies to you both jointly, so your allowance as joint owners is £3,750 each per year.

For any rent that exceeds the £7,500, you’ll both need to do a Self Assessment and pay tax on the excess – but more on this later. 

We don’t live in the property

If you’re landlords who don’t live in your property, i.e. if it’s purely a buy-to-let, you won’t be covered by the Rent-a-Room scheme. You’ll therefore both have to do a separate tax return and pay tax separately on your rental income. 

However, there are three allowances that you can use to reduce the amount that you pay:

  1. Tax relief on mortgage interest

First of all, what is mortgage interest? Basically, if you take out a loan to buy a property (a.k.a a mortgage), the mortgage interest is what you’re charged on top of the loan amount for the property – and this builds over time. 

When you buy a buy-to-let property, you can claim back 20% of the mortgage interest you pay each year. And this will be split between you and your co-owner. 

If, however, your overall income (including employment on top of your property business) is more than £50,000, you may not benefit. You can calculate what you’ll owe with our Rental Income Calculator.

Where do you get this rental income from?
In which year did you earn this income?
Monthly rental income
£
Monthly mortgage interest
£
Other monthly rental expenses
£
Annual salary
£
(or pension, self-employment, etc.)
After-tax rental income
After-tax rental income
£11,040
Expenses
Expenses
£3,600
Tax
Tax
£3,360
After-tax rental income
£11,040

You earned £18,000 from rent.

You also paid £0 in mortgage interest, and no longer can claim any of it.
You can claim £3,600 as other rental expenses.

Your taxable rental income will be: £14,400.

£12,000 will be taxed at 20%: £2,400 in rental income tax.

£2,400 will be taxed at 40%: £960 in rental income tax.

Expenses
£3,600
Rental income tax you have to pay
£3,360

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How your rental income tax is calculated

Your total rental income tax that you have to pay to HMRC depends on three things:

  • How much you earned from rent
  • If you also live there or not
  • How much you earned from other income sources (salary, self-employment, etc., but not capital gains)

In your case you earned £18,000 from renting out a buy to let property, on top of £38,000 from other sources.

Rental income tax breakdown

Your rental earnings are £18,000

You can claim £3,600 as rental expenses.

As a result, your taxable rental income will be: £14,400.

The first £12,000 will be taxed at 20%: £2,400 in rental income tax.

The next £2,400 will be taxed at 40%: £960 in rental income tax.

  1. Property Income Allowance

You should use this only if your yearly expenses are low. The Property Income Allowance lets you claim a flat rate of £1000 from your rental income, but you can’t claim it in addition to any expenses.

  1. Expenses

Your yearly spend on your rental property can be deducted from your income when you calculate your tax bill. The kinds of things that you can deduct are:

How does a joint ownership tax return work?

If you jointly buy a house, flat, maisonette, studio or any other residential property that you find, both you and your co-owner will have to do a tax return separately.

Here’s how:

  • Do separate Self Assessments – online deadline 5th October
  • Keep a record of all rental income 
  • Keep a record of all property expenses that you can deduct  
  • File your tax return by 31st January

The amount that you pay is based on your overall income. For the 2020/21 tax year, the rates are here:

IncomeTax rate
Up to £12,5000%Personal allowance
£12,501 to £50,00020%Basic rate
£50,000 to £150,00040%Higher rate
over £150,00045%Additional rate

What if the property isn’t owned 50/50?

Unless you’re married/in a civil partnership, your share of the rental profits will be based on the percentage of the property that you own. 

If you and your co-owner own the property 70/30 or 40/60, for instance, the tax that you owe will be calculated according to the split. 

But if you own your property with your spouse, HMRC will assume that the income is split evenly between you. It is possible to change this with a Declaration of Trust, but be aware that there’s a cost attached. 

Otherwise, it might be worth looking into using the Marriage Allowance which is a handy resource if one of you is a low-earner and the other earns less that £50,000 per year. 

Click here to read about the Marriage Allowance.

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