Can landlords spread rental profits between spouses and minimise tax?

You could try contacting u-tax.co.uk? They offer low cost tax advice, and I believe they have a specialist landlord team.

Hi Mark,

I can add nothing to your response to the query; we both know that 'yes' it is possible dependent on circumstance, however, each individual should seek legal/accounts advise to be sure it is specific to them.

I am however, intrigued by your third point where you suggest the spouse with the lesser tax code (in this instance the wife) become property manager - I'm not sure I understand, could you expand on how that works.

Hi Angela

First, thank you for posting your email as a comment. It's much better this way as other landlords can benefit from the Q&A session.

In answer to your question, it is quite a common occurrence for couples to be in different tax brackets. Rental profits can be legally manipulated to reduce tax liabilities between partners. There are a few different scenario's and professional advice should always be sought. As I have previously introduced you to my accountants and you are now using them yourselves they will no doubt advise you which scenario is best for you in due course. In the meantime though, below are a couple of scenario's.

Let's assume that Mr & Mrs own properties jointly as tenants in common and have joint mortgages. That's a very easy scenario as the rental profits can be apportioned in whatever way you choose as technically, you both own 100% of the property, not 50/50 as most people think. Therefore, if one partner is in a higher tax bracket the rental profits can all be attributed to the other partner.

If the properties are owned in the name of just one partner, say the higher rate tax payer, then that partner is quite within his/her rights to employ a property manager. There is no limit on how much can be charged for this service. Therefore, the lower rate tax payer can invoice for management fees for some or all of the profits. The management fees are then an expense item for the higher rate tax payer and an income for the lower rate tax payer.

I hope that answers your question.

Mark , What is the big advantage of earned rather than unearned income ? Given that you have to pay NI on earned income , but not unearned ?

It is pensionable for one thing

Just a thought, how about giving your wife an AST on the rental property then allowing her to sublet

Mark - Very surprised to read you saying that even though the properties are jointly owned you can still apportion the rental profits at other than 50/50. The HMRC website says 'Income from property held jointly by married couples and civil partners is treated as beneficially owned by the individuals in equal shares under ITA/S836. Consequently they are taxable on the income 50/50.'

As I said in my post, I am not an professional tax adviser and I do recommend that professional advice is soought. You are probably right, however, there will be a way to structure tax affairs using the broad principles I’ve suggested, of that I’m certain. Getting professional advice which is bespoke to individual circumstances s clearly the key.

Hi Mark,

Now that the January rush is over I have had the opportunity to look at your reader’s question.

Your suggestions seem reasonable, but as you know, it is difficult to give advice without having full details of the individual’s tax affairs. However I thought I would make the following points:

Rental profits of property jointly owned by a married couple (or civil partnership) are automatically split 50/50 unless the property is beneficially held in a different proportion and HMRC are advised of this. Any capital gain/loss on the sale of a rental property is split in accordance with the beneficial ownership percentages. The beneficial ownership percentage may be changed and the income taxed accordingly provided that the correct procedure is followed.

Joint ownership of a property does not necessarily mean a partnership business exists between those joint owners. If there is a partnership trade or profession business that also owns a rental property then those rental profits are split in accordance with the partnership agreement. Simply giving yourself a Trading Name does not create a trade or profession business and allow rental profits to be split as you see fit.

The creation of a property management business to manage a spouse’s properties is a legitimate way of saving tax, provided a management service is actually provided. There are Class 2 and Class 4 National Insurances to consider, and there may also be an employment status issue, so the joint ownership route may be preferable.

Going back to the reader’s question, the entire beneficial ownership of a property cannot be transferred to your wife and the property remain a jointly held property. The best you can do is a 1%/99% split. Rental profits are split according to the beneficial ownership percentages of the business, regardless of the bank account used, although to avoid an HMRC query, we would recommend opening a joint bank account. Although I am not a legal adviser, I would suggest that the tenancy agreement should be in the name of the owners of the property.

This is a very complex area and it is important to obtain professional advice to ensure that the correct structure is put in place for your needs.

My understanding is as follows and is also (I believe) robust when providing evidence to HMRC of the correct treatment of income derived from rental of property to a third party.

1. Property must be held in joint names identified on the TR1 document when the property is conveyed.

2. There must be a legally recognized partnership between the named beneficiaries of the rental income (legal marriage or civil partnership).

3. Income is shared evenly between the two beneficiaries unless another lawful instrument distributes the income in a different (and justifiable) ratio.

Keeping it simple on the basis outlined above should generate sufficient evidence to any reasonable enquiry that the reward to the joint owners is being treated in the right way but if individual circumstances require a deviation from these basics then professional advice should be sought to ensure compliance with prevailing legislation.