Rental properties: Getting the legals right
We all know the expression 'do as I say, not as I do'; sometimes you know what the right course of action is, and are quick to point it out to others, and yet you don't seem able to follow it yourself. So it was in the recent tax case of an accountant who tried to dodge the tax liability on property held jointly with his spouse; his argument being that as she was the one carrying on the business only she should be assessed on the rent.
It can be tax efficient for rental properties to be held by the spouse with the lowest income. For example, Mrs A pays income tax at the higher rate (40%) and Mr A pays tax at the basic rate (20%). If they buy a property in joint names then half of the profit on the rent will be taxed at 40% and the other half at 20%, giving an effective rate of tax of 30%. However, if Mr A owns the property then all of the profit on the rent will be taxed at 20%. This could also be used to avoid or reduce the impact of the high income child benefit charge.
So far so good: if you want the income from a property to be taxed on one spouse only then only that spouse should own the property. However, this may not always be possible; for example, because the lower-income spouse can not obtain a mortgage. This was the problem facing our accountant and his solution was to treat all of the income arising from the property as belonging to his wife on the basis that she managed the property business: all income/expenses were paid into/out of a bank account in her name, she dealt with the tenants and agents and she attended to repairs and maintenance.
Unfortunately for our accountant, the tax law in this area is
quite clear: where a property is owned jointly by a husband and
wife the income and expenses are to be split between them 50:50 no
matter who does what. Our accountant did have another option open
to him: completion of Form17 which enables couples to make a
declaration of their beneficial interests in an asset.
Unfortunately he did not go down this route and he now faces a
significant bill for unpaid tax, interest and penalties.
The moral of the story? Always make sure that the legal and other documents are in place at the outset to give you the tax treatment you want.