How to pay rental income tax from jointly owned properties
If a property has several owners, HMRC will expect each partner to:
- keep records
- file separate Self Assessment tax returns
- pay tax on their share of the income.
How much tax does each partner pay?
If you’re not married
Your share of the rental profits will be based on the percentage of the property you own.
- Lucy and Daniel are “only” girlfriend-and-boyfriend and invest in a flat
- Lucy puts 70% of the money and Daniel the remaining 30%
- next, they rent out the flat: Daniel will receive 30% of the income and Lucy 70%
- they will pay tax accordingly.
If you’re married or in a civil partnership
Things are different here: rental income must be split and taxed equally (50:50).
HMRC does not care whose bank account the rent money goes into – each spouse is assumed to receive 50%.
Should we choose a different split?
- you are in different Income Tax bands – you could have most of the rental income taxed at a better rate
- one of you is a stay-at-home spouse – they could use their Personal Allowance to save more on tax.
How do we choose a different split?
If you’re not married:
- ask a lawyer to draft a Severance of Joint Ownership
- file this with the Land Registry
- you don’t need to file anything else with HMRC
- just use the new percentages in your next Self Assessment tax return
If you’re married or in a civil partnership:
- ask a lawyer to draft a Declaration of Trust
- complete a Form 17
- file the form with the HMRC within two months
- HMRC will tax rental profits and gains based on the new split.
How much does it cost to do it?
- a Declaration of Trust or Severance of Joint Ownership is about ~£200 + VAT
- if you have a mortgage on the property, you might need to pay a Stamp Duty Land Tax charge
- if unmarried couples transfer a share in a home, this triggers Capital Gains Tax
- luckily there is no CGT on transfers between spouses.
What happens when we sell the property?
When married couples file a Declaration of Trust and Form 17, they are not transferring legal title to the property.
That’s why when you sell the property, you should reverse the process:
- assign 50% of the beneficial interest back to you
- file Form 17 again
- then both of you can use your CGT tax-free allowances.