How to split rental income between spouses

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    How to split rental income between spouses

    Splitting rental income with your spouse can be an excellent move for your finances. It can allow you to manage your budgets better and, in some cases, make impressive tax savings.

    HMRC automatically assumes married couples split rental income equally, but this isn’t always the best option. Perhaps you contributed more to the house and want to be fairly compensated, or maybe you’ve heard about the tax benefits of unequal shares. Either way, the good news is that you are more than entitled to split rental profits however best suits your household.

    In this blog, we want to help landlords discover how they can easily split rental income with their spouse or civil partner. Along with step-by-step guidance, our landlord accountants will also show you the financial benefits of sharing property revenue.

    Whether you have a thriving property portfolio or have just started out, we are more than happy to lend a helping hand with tax advice and practical guidance. Contact Guildford Accounting today, and let us make your life that little bit easier.

    What does splitting rental income between spouses achieve?

    The main idea of splitting rental income between spouses is to make the most of each partner’s personal allowances and reduce their overall tax burden. Perhaps one of you is in a higher tax band than the other. If that’s the case, then allocating more income to the lower-earning spouse can significantly reduce the overall Income Tax liability.

    Aside from the obvious tax benefits of using one partner’s Income Tax personal allowance, splitting your property’s rental income offers more fairness when it comes to financial responsibilities and planning. It also allows for a fairer distribution of household income.

    Is splitting rental income legal?

    Splitting rental income is perfectly legal for married couples and a smart strategy for tax purposes. But HMRC is very particular about how it is done. Always make sure to get it right and follow HMRC’s guidelines, which often change.

    Does the rental property need to be jointly owned to split the income?

    You may be thinking, “What if only one of us owns the property?” Well, even if the rental property is solely owned with only one person holding the legal title, you can still split the income.

    You can amend the legal ownership with the Land Registry so that your partner becomes a legal owner and gets entitlement to the profits. However, there can be tax implications to think about, especially if there is a mortgage involved. Alternatively, you can change the beneficial ownership to keep the property in your name but allow your partner to receive rental income.

    Who pays tax on rental income if jointly owned?

    When it comes to paying tax on rental income from a jointly owned property, both couples will have their share of responsibility depending on how the property is split. It’s a fairly straightforward approach, with joint tenants paying Income Tax equally and tenants in common paying based on their ownership ratio. The same applies to Capital Gains Tax.

    You’ll ultimately be taxed based on your individual overall income and in line with your current tax band.

    In what ways can you divide rental income?

    Rental income can be divided into equal or unequal shares. Here’s how:

    Joint tenants

    Owning the property as joint tenants (or “beneficial joint tenants”) is the most common way to split rental income. It is HMRC’s default for married couples. Each partner has equal rights to the property, and any income received will be split 50/50.

    Tenants in common

    Owning the property as tenants in common enables married couples and civil partners to choose their share of property ownership and rental income. Couples can choose any ratio that suits their needs (e.g. 60% to 40% split).

    How do you split rental income between spouses?

    Splitting rental income with your spouse or civil partner can happen in a few ways. But first, it’s important to think about how you own the property and your financial goals.

    Are you looking to lower your tax liabilities? Or do you want to fairly reflect the initial contributions to the property?

    Joint tenancy is the default ownership structure for married couples. This means that HMRC will automatically split any rental income received 50/50. But, if you’re looking to split the rental profits any other way, then you can inform HMRC to have the beneficial interest changed.

    Now, let’s break it down in a quick and digestible way.

    Here’s how to split rental income between husband and wife or civil partners:

    1. Determine the ownership status – 50/50 split or tenants in common.
    2. Create a Declaration of Trust if you wish to split the income differently to the beneficial ownership.
    3. File Form 17 to notify HMRC of your chosen split.
    4. Submit the form and Declaration of Trust to HMRC within 60 days of signing.
    5. Keep hold of all existing and future rental records for tax compliance.

    Do you have to be married to split rental income?

    You don’t have to be married or in a civil partnership to split rental income. Friends, family members and business partners can also co-own property and split profits. Usually, each person involved will share the rental income based on the percentage of the property they own.

    Since HMRC won’t automatically set the default to 50/50 for your rental property as they do for married couples, it is up to you and any other parties involved to determine how the rental profits will be split. This could be based on ownership percentages, financial contributions or the level of work each party puts in.

    Maximise your personal allowance with Guildford Accounting

    Are you considering an unequal split of your property income? Whether you need support splitting rental income, managing tax liabilities or any other aspect of property accounting, we’re here to take the financial load off you.

    We’ll ensure your property is set up in the most tax-efficient way to make the most of your and your partner’s personal allowance. We’ll handle ongoing financial activities so you can sit back and reap the benefits of your property income.

    We pride ourselves on our friendly accounting service and transparency. If you have any burning property-related questions or simply want to find out how we can help, then please get in touch today.

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