Regardless of whether you jointly own a property with your partner, your friend, or a family member, there would hardly be anyone who isn’t interested in knowing how to save tax from the joint property. It is also important to understand when you may need to pay capital gains tax on jointly owned properties. While the joint property might be a good source of passive income, the complicated taxation process can get a tad bit overwhelming for most.
In this article, you’ll receive exhaustive information on everything you need to know about tax-saving tips for jointly owned properties.
What is Joint Tenancy and Tenancy in Common?
First things first, let’s learn a little about what joint ownership of property means in England and Wales.
Joint ownership of property is largely categorized into two forms – joint tenancy and tenancy in common. Let’s take a brief look at each:
The tax implications for joint ownership can vary depending on the tax year, as the annual capital gains tax allowance and deadlines for submitting tax returns and paying capital gains tax are specific to each tax year.
Joint Tenancy
In joint tenancy, both the owners are treated as having an equal share and equal rights in the property. If one of the owners dies, the part (half of the property) will be automatically passed on to the surviving partner.
For taxation purposes, each owner is treated as having an equal share in the property and its income. For example, you are a joint property owner of a house worth £100,000 along with your partner. The annual revenue generated from the property is £5,000 under joint tenancy. So, tax is calculated on the income of £2,500 for both owners. And, each property owner is taxed for half the capital gains generated from the property when it is sold. Basic rate taxpayers will pay different rates on their share of the capital gains compared to higher and additional rate taxpayers. It is the standard followed for taxation for both spouses and other owners.
Tenancy in Common
In case of tenancy in common, both joint owners are taxed on a predetermined share of the property.
For example, a person can own 40% of a property while his partner can own 60% of the same property. For computing taxes, each owner is taxed on the pre-fixed percentage in the tenancy in common. The total taxable income is calculated based on the predetermined share, which includes the individual’s share of the property and any other taxable income and gains, after allowable deductions. For civil partners and married couples, by default, the tax is determined on 50% of the share – regardless of whether the predetermined split is different.
Is it Possible to Change the Default 50 – 50 split?
We now know that the default split of share and income generated from joint ownership property is 50:50 for civil partners and married couples. You can change this equal default share by election. You’ll have to fill out Form 17 and submit the same to HMRC to make the changes in equal ownership. You can download the form from the Government publications website.
Form 17 can be used to declare beneficial ownership if you meet the following criteria:
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You are in joint ownership with your spouse or civil partner and hold ownership in unequal shares.
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You are permitted to receive the income generated from the proportion of shares. And you wish to be taxed on this basis.
However, it would help if you remembered that this request to change can’t be made retrospectively. It is possible to go to a maximum of 60 days before the form is filled, provided you had signed the documents.
You should also remember that you can’t declare unequal shares just for the sake of taxation. You should furnish actual beneficial ownership details in Form 17. Moreover, HMRC also requires proof of beneficial ownership – mostly a deed of trust.
For example, in Form 17, if you had declared a 10:90 income split between you and your wife, even though you are the 100% beneficial owner of the property, the election will be deemed invalid by HMRC.
Additionally, you will need to file a tax return to declare the new split to HMRC.
Is it Possible to Change the Election Form 17 many times?
If you wish to change the beneficial ownership, you can change the split any number of times using Form 17. There is technically no limit to the number of times you can change the beneficial ownership split. However, every time you seek to change the division, you must prove a change in beneficial ownership.
Changing the beneficial ownership multiple times can also affect the CGT annual exempt amount, as each change may impact how gains are offset and the overall CGT liability.
How is Tax Calculated for Joint Owners other than Married Couples?
Unlike the case of married couples or civil partners, the income is not split into 50:50 terms for unmarried couples or independent partners owning joint property. So, such joint partners can decide to share the revenue in any manner they wish. Joint owners must also pay income tax on any rental income received from the property.
Suppose two independent partners own joint property, and they share the income in the 90:10 proportions. In that case, the tax will be calculated on the actual treatment even though the beneficial ownership split might be 50:50.
It might seem like Form 17 is not relevant for other joint owners. However, it is best if you had some proof to show the determined split of rental income. Additionally, it is also better to split the bank receipt to show that the rental income has indeed been split according to the agreed terms.
The income split and share in beneficial ownership concepts can get a wee bit confusing. Beneficial ownership of the property defines the proportion of joint property owned by you. This proportion is usually decided during property purchase time. If this share has to be changed later, Capital Gains Tax will also be computed as the change will be considered part disposal of property for tax purposes.
How to Save Tax by Transferring Beneficial Ownership Before Sale
Now that we have established that the beneficial ownership of property can be changed and transferred any number of times, we need to know how to achieve tax savings. To do that, you can start by transferring the property share to your spouse before the sale commences to achieve overall lower tax liability. It will work well only if done correctly.
Private residence relief can significantly affect the tax implications of transferring ownership before sale. Usually, when selling a main or only home, individuals don’t have to pay any capital gains tax due to private residence relief. However, capital gains tax may apply when selling a buy to let property or second home.
The next important point to consider is whether the person the property is being transferred to – the transferee – is entitled to receive money from the sale. If the person is not beneficially entitled, then the transfer of the property share before the deal will be deemed invalid. Besides, you should work out the property details before agreeing to the property sale. It is always safer to make the property transfer before putting the property for sale in the market.
Wrapping Up
These were some tax-saving strategies if you jointly own a property with your partner, spouse, or others. With these strategies, you can save some money and protect yourself from a lot of tax-related stress. Although taxation is a complex concept for many, it is crucial to have basic know-how on taxes so that you don’t end up paying more than what you absolutely must. It is also important to calculate and pay the tax bill on time to avoid any penalties or additional charges. For Free Consultation call us on 03300 575 902
Frequently Asked Questions – FAQs
What are the tax implications of owning a property jointly?
Owning a property jointly can have various tax implications, including income tax, capital gains tax, and inheritance tax. It’s important to understand how these taxes apply to jointly owned properties. If you have made no other capital gains in the same tax year, you may choose not to use the small part disposals of land rules to preserve a higher base cost for future disposals.
Are there any tax benefits of owning a property jointly?
Yes, there are tax benefits to owning a property jointly, such as the ability to split rental income and expenses, which can result in lower overall tax liability. Additionally, joint property owners can benefit from a tax-free allowance, reducing the taxable amount on their share of the income.
How can I save taxes on rental income from a jointly owned property?
To save taxes on rental income, consider utilizing the benefit of joint ownership to split the rental income and expenses in a tax-efficient manner. Additionally, consider making use of allowable deductions and expenses to reduce the taxable rental income.
What are the capital gains tax implications when selling a jointly owned property?
When selling a jointly owned property, capital gains tax implications may arise. It’s important to understand how the gains will be divided and the tax implications for each owner. Each owner may need to pay tax on their share of the gain, and this could include paying tax in the country where the gain was made, with potential relief available if taxed twice.
Can I claim tax deductions for jointly owned property expenses?
Yes, you can claim tax deductions for expenses related to the jointly owned property, such as mortgage interest, property taxes, and maintenance costs. It’s important to keep accurate records of these expenses for tax purposes.
Are there any tax planning strategies for jointly owned properties?
Yes, there are tax planning strategies for jointly owned properties, such as using the ownership structure to minimise tax liabilities, considering the use of trusts, and taking advantage of available tax reliefs and exemptions.
How can I minimise inheritance tax on a jointly owned property?
Minimising inheritance tax on a jointly owned property can be achieved through proper estate planning, such as utilising the spousal exemption, making use of the residence nil-rate band, and considering the use of trusts.
What are the tax implications of renting out a jointly owned property?
Renting out a jointly owned property can have tax implications, including the need to report rental income and expenses, understanding the tax treatment of joint rental income, and complying with tax regulations.
Can I transfer ownership of a jointly owned property to save taxes?
Transferring ownership of a jointly owned property can have tax implications, and it’s important to consider the potential capital gains tax and stamp duty implications before making any transfers. Additionally, stamp duty land tax (SDLT) may apply when there is a transfer of property ownership, especially if the consideration, such as assuming a share of a mortgage, exceeds certain thresholds.
How can I ensure compliance with tax regulations for jointly owned properties?
To ensure compliance with tax regulations for jointly owned properties, it’s important to keep accurate records, stay informed about changes in tax laws, and consider seeking advice from tax professionals to navigate the complexities of taxation for jointly owned properties.