Tax saving advice for Landlords on higher tax brackets

When it comes to co-owning property, two common arrangements are joint tenancy and tenancy in common. Both have distinct legal implications and benefits, making it crucial to understand their differences before deciding which suits your needs. Joint Tenants In a joint tenancy, all owners have equal shares in the property. This arrangement includes the right of survivorship, meaning if one owner dies, their share automatically passes to the surviving owner(s). This is often preferred by married couples or close family members because it simplifies the transfer of ownership upon death. Key features of joint tenancy: Equal ownership shares. Right of survivorship. Requires all owners to acquire their interest at the same time. Tenants in Common Tenancy in common allows owners to hold unequal shares in the property. Each owner can independently sell or bequeath their share without the consent of the other owners. This flexibility makes it suitable for business partners or investors who may want to sell their interest in the property separately. Key features of tenancy in common: Ownership shares can be unequal. No right of survivorship. Each owner can sell or transfer their share independently. Using a Deed of Trust for Income Sharing Tenants in common can use a Deed of Trust to specify how income from the property is shared, which may differ from the ownership shares. For instance, if one owner contributes more to the property’s upkeep, the Deed of Trust can reflect a higher income share for that owner. Informing HMRC with Form 17 When spouses or civil partners own property as tenants in common and wish to share income differently from their ownership shares, they must inform HMRC using Form 17. This form, along with the Deed of Trust, provides evidence of the agreed income split. HMRC’s Default Assumption Without a Deed of Trust and Form 17, HMRC assumes a 50/50 split of income between spouses or civil partners and taxes them accordingly. Therefore, it’s essential to complete these documents to ensure the income is taxed based on the actual beneficial interests. Example of Tax Savings Let’s consider a scenario where one spouse earns £60,000 per year, placing them in the higher tax bracket, while the other spouse has no income and is not using their £12,570 personal allowance. If they receive £12,000 per year in rental income, here’s how the tax savings can be achieved: Without Deed of Trust and Form 17 HMRC assumes a 50/50 split: Each spouse receives £6,000. The higher-earning spouse pays 40% tax on their £6,000 share: £6,000 * 40% = £2,400. The spouse with no income pays no tax on their £6,000 share as it falls within their personal allowance. Total tax paid: £2,400. With Deed of Trust and Form 17 The rental income is allocated entirely to the spouse with no income: The spouse with no income receives £12,000. This amount is within their personal allowance (£12,570), so no tax is paid. Total tax paid: £0. By using the Deed of Trust and Form 17, the couple can save £2,400 in taxes annually. This strategy ensures that the rental income is taxed more efficiently, leveraging the personal allowance of the spouse with no other income.