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Sharing Family Rental Income

Newsletter issue - February 09.

In these difficult times it makes sense to share out the family income as much as possible so all the family's tax free allowances are fully used. You can't redirect some of your pre-tax salary to your family members, but you can give your spouse or adult children assets that will generate income. A let property is ideal for this.

First check how your let property is owned. Is it held...

  • just in your name, as 'joint tenants' meaning the owners hold equal shares in the property, or
  • as 'tenants in common', where the owners may hold different proportions of the property, say 30% and 70%.

Generally property owners are taxed on the proportion of the property income that relates to their interest in the property. However, married couples are automatically taxed on half the income each, unless the Taxman is told otherwise.

Half the profits from the property may not use up all of your spouse's personal allowance. To put more of the property income in their hands to help save tax you need to change the way the property is owned so your spouse owns a larger proportion of the property. To do this you can ask a solicitor to change the ownership so the property is held as tenants in common in the shares you want.

Once this is done you need to tell the Taxman who owns what share in the property by completing Form 17 and sending it to your tax office. The new ownership proportions will apply for tax purposes from the date of change as long as the Taxman receives the signed Form 17 within 60 days of the change in ownership.

You won't have to pay capital gains tax when you transfer a share in the let property to your spouse if this is done in a tax year when you are living together.

If you are not married to your partner, the gift of a share in property is treated as a sale at market value and you may have to pay capital gains tax on that deemed sale. The same applies if you give a share in a property, or a whole property, to your children.

If the mortgage secured on the let property is also transferred from the name of one person into the names of both of the owners, the new owner may need to pay some Stamp Duty Land Tax if the amount of mortgage transferred is above stamp duty limits. However, the new owner needs to be included on the mortgage deed so they can claim part of the mortgage interest as a deduction on their tax return against their portion of rents received from the property.