Jointly Owned Buy-To-Let Property & Deed of Trust
The Basic Rule
According to Income Tax Act 2007 (ITA2007/S836), where the property is held in joint names of husband and wife, each spouse is treated as beneficial entitled to the income in equal shares e.g. 50:50 for income tax purposes.
We act for several buy-to-let investors who are married or in civil partnerships and require a more tax efficient way for allocating income between themselves especially when one spouse is a higher rate tax payer and the other half is a lower rate tax payer. Purchasing a property in joint names usually takes in the form of either ‘tenants in common’ or ‘joint tenants’.
Tenants in Common
As tenants in common:
- you can own different shares of the property
- the property doesn’t automatically go to the other owners if you die
- you can pass on your share of the property in your will
With tenants in common each owns a set share - this can either be half each, or a defined percentage e.g. 90:10. Typically the larger share owned by the lower-rate tax payer, then both the income and capital follow the proportion.
Generally, HM Revenue & Customs treats income from a property that is owned jointly by a married couple or civil partners as if it belongs to each spouse or civil partners in equal shares and each spouse or partner is taxed on half the income even if the property is owned in unequal shares.
As joint tenants (sometimes called ‘beneficial joint tenants’):
- you have equal rights to the whole property
- the property automatically goes to the other owners if you die
- you can’t pass on your ownership of the property in your will
Where property is held in joint names; it is presumed to be held beneficially as joint tenants where partners are taxed on a 50: 50 split.
However, presumption can be displaced by evidence to the contrary, such as:
- The income is from furnished holiday lettings;
- There is actually a partnership in which case the income is divided according to the terms of the partnership agreement;
- A declaration of trust/ deed of trust of equal or unequal shares where both owners, sign a declaration stating their beneficial interests in both the property and the income arising from it;
- Notice of severance of the joint tenancy by one of the joint owners
According to Trust, settlements and Estate Manuals (TSEM9842), married couples and civil partners can, in certain circumstances, ask to be taxed on their actual entitlement to income from jointly held property. They do this by making a joint declaration of unequal beneficial interests for example declaration of trust or deed of trust.
Declaration of beneficial Interests in joint property and income (Form 17) must then be submitted to HMRC within 60 days of the date it was signed. The evidence that you need to provide when you submit Form 17 to HMRC is either a declaration of trust/deed of trust or a copy of the land registry entry.
However, if the shares are equal, where a husband and wife or civil partners own property as beneficial joint tenants, there would be no possibility of a declaration on form 17 for tax purposes; hence Form 17 declaration can only be made if the individuals are beneficially entitled to the income in unequal shares. A declaration is only valid if their interests in the income and in the property itself correspond.
Once a Form 17 is in place the income will be split based on the declaration until:
- The couple separate or divorce
- The beneficial interest of the spouse/civil partner changes