Typically, taxpayers are taxed on rental income from jointly owned properties according to their share of beneficial ownership. However, for spouses or civil partners, the default rule is to split rental income 50:50, regardless of the actual ownership split.
To have rental income taxed based on the actual share of beneficial ownership, spouses or civil partners must make an election to HMRC. This involves submitting Form 17 and providing evidence of the unequal beneficial ownership. Once a valid Form 17 is filed, each spouse or civil partner will be taxed according to their actual share of ownership.
A recent case underscores the complexity of this area
The First-tier Tribunal (FTT) upheld HMRC’s penalties against a taxpayer who failed to report rental income from a jointly owned property. The property had been rented out since 2007. Although the taxpayer had employment income, his wife had no other income, leading them to believe the rental income belonged entirely to her. As the rental profits were below her personal allowance, they assumed no tax was due and did not seek tax advice.
When HMRC discovered the unreported rental income over 15 years later, the taxpayer was assessed for tax on his share of the profits and faced a penalty of 20% of the underpaid tax. This penalty was reduced due to the taxpayer’s cooperation. The FTT acknowledged the taxpayer’s honesty but noted his lack of understanding of the tax implications.
To optimise tax efficiency, spouses and civil partners should submit Form 17 if they have not already done so
Even if an underpayment was unintentional, HMRC can impose a minimum penalty of 20% of the underpaid tax. With HMRC increasing efforts to scrutinise landlords’ tax affairs through tenancy deposit schemes and platforms like Airbnb, it is crucial for taxpayers to ensure their property income tax affairs are accurate and up to date to avoid potential discrepancies.
Should you wish to discuss tax efficiency and compliance of your personal finances and more specifically, joint rental income, please make contact with a member of the CB Reid team.