In this article our guest writer, Amer Siddiq, from Tax Insider will provide you with helpful tips on property partnerships, in the final instalment of the two part series.
There is no doubt that owning properties in a partnership can be an excellent income tax–saving strategy. In this article you will learn about the different types of partnerships and how to declare a partnership split to HMRC.
Partners must be trustworthy
If you buy property in a partnership, then you MUST make sure that the partners with whom you are purchasing are people who you implicitly trust e.g, a spouse, your mother, your father, etc.
This is not just for tax reasons; it is simply good business practice.
Partnerships between husband and wife
HMRC will treat all properties purchased between husband and wife (other than shares in a close company) as a 50:50 split, unless otherwise stated.
This means that unless you tell HMRC otherwise, you will both be taxed 50:50 on any property rental profits.
A considerable amount of tax can be saved by having a property jointly owned by husband and wife, especially if one or the other is a nil- or a lower-rate taxpayer. It is important to note that if you intend to have a property between husband and wife as a non-50:50 split, then you must have an agreement between the two of you to say that this is the case.
It is not enough to just make a declaration to HMRC stating that a property is owned in unequal shares. It must actually be owned in this manner, and documentary evidence must be made available if requested by HMRC.
The following case study illustrates this scenario along with considerable tax savings:
Potential tax savings between husband and wife
After five years of marital bliss, John and Lisa decide to buy an investment property.
John is a 40% tax payer, whereas Lisa is a homemaker and therefore has no income.
They buy a two-bedroom terraced house for £80,000. They decide to have the property as a 90:10 split between the two of them in favour of Lisa and produce documentary evidence to support this.
They also inform HMRC of this split. (The property is split in this manner to take advantage of Lisa’s personal income tax allowance—in other words, they want to reduce their tax bill!)
They make £6,000 rental profit on the property on an annual basis. This means that the profit is split as follows:
- Lisa’s share of the profit is £5,400
- John’s share of the profit is £600
Lisa has no tax liability as her profit is within her tax allowance, and John pays £240 tax on his £600 profit.
If the property had remained as a 50:50 split, then the total joint tax liability would have been £1,200 (i.e. 40% of John’s £3,000 share).
Therefore they have an annual savings of £960! Over 10 years, this gives tax savings of at least £9,600.
Partnerships between those other than a husband and wife
If a property is purchased as a partnership between those other than a husband and wife, you MUST inform HMRC of the split.
In this type of partnership HMRC do not make any assumptions as to how the property is split. It is the taxpayer’s duty to tell HMRC how the property has been split, and it must be based on fact.
For example, if you buy a property in a partnership with a friend, in which he or she provides 70% of the deposit and you provide 30% of the deposit, then you must also inform HMRC of the 70:30 split.
How to declare a partnership split to HMRC
If you are a husband and wife wanting an unequal split, then you must make a declaration to HMRC about the ownership split.
Such a declaration takes effect from the date it is made, providing notice of the declaration is given to HMRC via Form 17 within 60 days.
It is important to note that the form only covers the assets listed on it. This means that if you have other properties, they must also be listed to make HMRC aware of split.
Evidence of the ownership of the asset should also be provided to HMRC together with Form 17.
Please note that different HMRC offices differ with regards to what evidence is required to prove the ownership split for a property.
There are two common ways to prove the split:
a) Provide a signed declaration by the two parties concerned detailing that ownership of the joint property is split in a specific way.
This is acceptable to some HMRC officers. However, other officers will want more formal proof.
b) Provide more formal property documents that include the following:
i. the deeds of conveyance;
ii. bank accounts (to see letters to and from the bank confirming the change).
The best thing is just to send in (a), but be prepared to send in (b) if HMRC requires it or asks any further questions.
Moving properties into joint ownership to avoid income tax
If you have realised from this strategy that you can save tax by holding your property in a partnership, then you may well be thinking about how to transfer to joint ownership.
Well, it is actually very easy to do, and you will incur no capital gains tax liability if you are transferring part ownership to your spouse e.g, your husband or wife.
Three simple steps to follow:
The following three steps will show you how you can transfer the property into joint ownership:
STEP 1. Contact your mortgage lender
Tell your mortgage lender that you want to transfer the property into joint ownership, and explain why you want to do this.
Your mortgage lender will then send you a new mortgage application form for you to complete in order to move the property into joint ownership.
Unfortunately, lenders will treat transferring an existing property into joint ownership as though you are applying for a new mortgage. Therefore it is very likely that you will have to submit the same paperwork again and effectively apply for a new mortgage.
It is likely that the property will be put into joint names on the same terms as the original contract; that is, if the original mortgage was fixed at 4.99% and had four years left to run on the fixed period, then the new mortgage will also be the same.
However, if mortgage rates have reduced, then be cheeky and ask if you can also have it at the new reduced interest rate!
STEP 2. Contact a solicitor
Once your mortgage application has been approved, your solicitor can have all relevant documents changed into joint names pretty quickly. It usually takes about four weeks to complete all the legal paperwork.
Also, tell your solicitor whether you want the property to be owned as ‘joint tenants’ or as ‘tenants in common’, and how you want to split the ownership of the property.
For example you may want to hold the property in the majority of the lower rate tax payer, so that you pay less tax.
Whenever a property is being purchased by more than one person or transferred into multiple ownership you solicitor should always ask you how you wish to hold the property.
STEP 3. Notify HMRC
If you decide to have an unequal ownership split, then tell HMRC of this split as soon as possible.
Don’t delay in notifying HMRC as it could well cost you in tax penalties.
For more information look to our tax articles on our website www.martinco.com
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