Can landlords spread rental profits between spouses and minimise tax?
Published 28/01/2013 
One of our readers has sent in the following email (dark blue text below) and is looking for ideas that other landlords have used to minimise tax by spreading rental profits between spouses.
Mark Alexander has shared a few thoughts but would like to point out that he’s not a qualified tax adviser. Therefore, we have also included a contact form for you to get in touch with the accountants Mark uses. He’s also invited their landlord tax expert, Neil Barlow, to comment.
“I am just buying another Buy-to-Let property and this will push me into the higher rate tax area. I understand I can create a declaration of trust document which will assign the beneficial interest of a property’s income fully over to my wife. She will now need to serve a tax return annually, but she will still be below the 40% tax rate even with her job income.
The question which I am not sure about is whether the tenancy agreement has to be in her name and the rent paid to her bank account. It would be easier for admin purposes for me to have to deal with all these issues as I do this already. Would this mean that I would now have to act as an agent for my wife to get round this issue?”
Mark Alexander commented as follows
I can think of quite a few things that you could look into but I do urge you to take professional advice. If you would like me to introduce you to the accountancy firm I use personally please complete the form at the bottom of this article. Other landlords may well leave suggestions below the article in the comments section of this thread. Here’s my suggestions though:
- If you are buying for cash why not buy the property in your wifes name? You can easily switch it back to joint names at the point of selling it on in order to benefit from both CGT allowances if necessary. I know a lot of men worry about what would happen in terms of divorce in these scenarios but having been through that I can assure you that it changes nothing.
- Why not buy the property in joint names and apportion the the income as best suits your tax affairs?
- Have you considered setting up your wife as a property manager? It’s a none regulated business and very easy to set up. You wife could then invoice whatever share of the profits were most tax advantageous. So long as you don’t exceed that VAT threshold in terms of the amounts invoiced that could be incredibly efficient as you would be converting unearned income to earned income too
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Puzzler says:
29/01/2013 at 06:48
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Alan Capper says:
29/01/2013 at 08:58
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Mary Latham says:
29/01/2013 at 10:01
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Mark Alexander says:
29/01/2013 at 12:09
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Mark Alexander says:
29/01/2013 at 15:18
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Neil Woodhead says:
29/01/2013 at 22:42
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Claude says:
30/01/2013 at 10:33
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Scotty says:
30/01/2013 at 11:34
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Mark Alexander says:
30/01/2013 at 14:46
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Mark Alexander says:
30/01/2013 at 15:47
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onlinelettingagents says:
31/01/2013 at 17:35
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ASM says:
31/01/2013 at 22:49
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Mark Alexander says:
01/02/2013 at 01:58
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Sean says:
02/02/2013 at 05:17
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Mark Alexander says:
02/02/2013 at 06:18
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Rick says:
02/02/2013 at 08:22
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J says:
02/02/2013 at 10:31
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Mark Alexander says:
02/02/2013 at 14:56
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Neil Barlow FCCA ATT says:
04/02/2013 at 12:21
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Andy says:
05/02/2013 at 01:02
Leave a commentIt’s income tax, so if she receives the income then her tax situation applies. I don’t think you can keep the income yourself and apply her situation to it, but you are married so what you do with it once you have received and paid tax on it is between the two of you. Have it paid into a joint account, problem solved. I had the opposite situation where I was taking the income on a jointly owned flat, possibly not the most tax efficient but easier for admin as you say. I was advised by the tax office that as I was receiving the income, I didn’t need to account for it in my husband’s tax affairs. Of course she might want to keep it but that’s for you to sort out
otherwise you’ll have to bite the bullet and pay the higher tax rate.
I don’t understand about acting as an agent for your wife, just fill in the tax return. The tenancy probably should be in her name for simplicity.
Sometimes stating the obvious seems foolish – but then the ONLY truly foolish statement is the one you DON’T make. So I presume, for Tax purposes, that you have a Trading Name and are not simply operating on your own. My understanding, from my Accountant (PLEASE seek advise into this yourself) is that as my wife and I trade/deal with property (on a Self-Employed basis) under a Trading Name, we can move rental profits/expenses between ourselves. The Trading Name is with respect to a Sole Trader or Partnership which incurs NO cost but affords us the Tax benefits associated with alternative streams of income.
In many ways my wife is like a “silent partner” as regards our property portfolio, so I deal with everything but rely on my Accountant for the Tax details. I find there is no need to “get round things” as there is sufficient help already in place.
Ahem Mr A it is not just MEN who have to worry about what will happen in a divorce or breakup. Successful women have the same issues!!!!!
I knew a couple who had joint property holdings that were all in the husbands name. Before he left her he mortgaged them up to the hilt. I don’t know the detail but she came out with very little.
This is a very interesting warning
Property investors should watch out for a new tax trap inadvertently set up by solicitors and the Land Registry.
Lawyers are encouraging all joint property buyers to sign an express declaration of trust detailing their percentage ownership.
The form is then filed with the Land Registry as evidence if any dispute about joint ownership arises should the couple’s relationship break down.
The move is the result of two recent court cases involving unmarried couples arguing over money and property when their relationships ended.
The Law Society and Land Registry want solicitors to encourage buyers to sign the declaration.
However, property investors should know that the Land Registry database is linked to HM Revenue & Customs and the forms could end up triggering tax inquiries.
Source http://www.landlordzone.co.uk/blog/news/lawyers-set-up-tax-trap-for-property-investors
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Hi Puzzler, the point about appointing the wife as agent was my suggestion. What we don’t know is how many properties this landlord owns or how much profit is being made. However, let’s assume it’s 10 properties and each are returning a profit of £200 a month. That’s £24,000 of profit per annum. If the wife manages the portfolio what’s to stop her invoicing the full £24,000 a year as a management fee, thus reducing the profits and hence the tax on the portfolio to hubbie to zero?
Hi Mary
The reader is a man, hence the gender references. Obviously my advice cuts both ways.
In the case you’ve mentioned I can’t see why the wife came away with very little. The remortgages obviously raised case. Was this spent? If so, that money would be treated by a judge as having come out of the mans share of the entitlement. Had the properties have been in joint names then the mortgages could not have happened without joint consent. Another way to protect against this would be to take advice from a good conveyancing solicitor who could register interests for husband and wife on all properties, regardless of who’s name they were owned in according to HM Land Registry. With the benefit of cautions, charging orders, restrictions or whatever they are called these days neither party can easily dupe the other if things are set up properly. For details of the conveyancer I’m using and referring landlords to now please see >>> http://www.property118.com/?p=33879
If the property is in joint names then the HMRC look on it as a partnership and the net income can be allocated to either party or both in any proportion.
Hello Mark, I made a very similar suggestion to my accountant – about invoicing for property management charges ( only difference was rather than my wife invoicing I suggested invoicing through a limited company Wevare Directors of ) I paraphrase my accountants reply ‘Save you a very long complicated and expensive answer. Don’t go there’ I never got to find out why not. I assume that HMRC would view that I was having my cake and eating it – but are you suggesting that Mrs C could set upas a sole trader and invoice management charges…makes sense to me.
Hi Mark. One of the properties i manage is owned by a couple who jointly bought a property in a 50/50 equal share, and the rent is paid into a joint bank account. When the accountant does the yearly accounts the rental income is split evenly between the two of them for tax purposes.
Hi Claude, your accountant should be suggesting these things to you. Time to change perhaps?
Hi Scotty, I don’t see a problem with that if they both earn similar amounts as creativity is not necessary in those circumstances.
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.