Could a 99:1 partnership with your spouse soften Section 24?

When one spouse faces a substantial tax bill on the rental business while the other has spare lower-rate tax capacity, reviewing how the business is owned and its profits are shared can make a meaningful difference. A properly established partnership could allow profits to be shared 99:1. In the example below, that leaves the household £5,940 better off each year, before implementation and ongoing costs.

A rental portfolio can produce a respectable income before tax and leave surprisingly little afterwards. For some couples, that pressure is made worse because the rental income belongs to the spouse who already has the higher salary or pension.

The practical question is whether the couple’s arrangements still suit the business and the life it is meant to support. Improving household cash flow, organising ownership and responsibilities, and planning for retirement may help them retain properties and fund maintenance. A genuine partnership is one option worth examining.

The HMRC passage landlords should read

HMRC’s Partnership Manual, PM132400, discusses taking a spouse or civil partner into partnership to make better use of tax reliefs. It includes this particularly clear statement:

“a partnership is not a sham merely because it is set up to save tax”

The same guidance explains that a partner’s profit entitlement cannot simply be challenged by comparing it with the value of their work, as might happen with a salary. A spouse need not contribute their own capital or take an active management role to be a partner.

That is useful reassurance, but it has a specific meaning. It does not approve every arrangement bearing the name “partnership”, or settle every anti-avoidance question. The guidance also points readers towards the settlements legislation, which must be considered when income is shifted between family members.

Why the profits do not have to be shared equally

HMRC’s PM137000 guidance confirms that partners can agree their profit-sharing proportions. Those proportions need not match their contributions of capital or effort.

Where one spouse has substantially more spare lower-rate tax capacity, an agreement allocating 99% of the income profits to that spouse and 1% to the other may therefore be worth considering. Equal sharing is not a requirement.

The appropriate split depends on the couple’s circumstances. A 99:1 allocation is an illustration, not a prescribed ratio or an assurance of the best outcome for every household. The agreement must create genuine entitlements, and profits cannot be reallocated retrospectively after the accounting period has ended merely to improve the tax result.

It is also important to distinguish income profits from capital ownership. A 99:1 profit split does not, by itself, determine who owns the properties or how capital proceeds will be shared. Those rights require separate consideration, including under the settlements rules explained below.

Why Section 24 makes the difference important

Under the rules commonly called Section 24, individual residential landlords generally calculate taxable rental profits without deducting mortgage interest and other restricted finance costs. They then receive a tax reduction, subject to limits. For 2026/27, that reduction is calculated at 20%.

HMRC’s PIM2054 guidance expressly confirms that the restrictions apply to individuals operating through a partnership too. A partnership therefore does not restore an unrestricted deduction for mortgage interest. Its potential benefit is that some rental profit can legitimately become taxable on a spouse whose applicable rate is lower.

The finance costs must follow the correct allocation. Under HMRC’s calculation in PIM2058, a partner’s share of the partnership’s qualifying finance costs follows their percentage profit entitlement. With a 99:1 profit split, those finance costs are allocated 99:1 for this purpose too.

A £5,940 annual difference in a straightforward example

Consider a hypothetical married couple living in England in 2026/27. Alex has a £60,000 salary and owns the rental business. Sam has £15,000 of employment income. They want to retain the properties and improve the income available to support their household.

Their annual rents are £40,000, ordinary allowable expenses are £10,000 and qualifying mortgage interest is £15,000. The business therefore produces £15,000 of cash profit before tax, but £30,000 of taxable rental profit.

Assume they establish a genuine partnership with effective property arrangements and rights that satisfy the relevant rules. They agree that Sam is entitled to 99% of the income profits and Alex to 1%, with that arrangement operating for a full tax year.

Sam’s share of taxable rental profits is £29,700. Added to the £15,000 salary, that gives total income of £44,700, below the £50,270 higher-rate threshold under the 2026/27 income-tax bands. All Sam’s rental profit therefore falls within the basic-rate band. Alex’s £300 share falls within the higher-rate band.

The calculation is straightforward. Sam pays £5,940 tax on £29,700 of rental profits, reduced by £2,970 of finance-cost relief, leaving £2,970. Alex pays £120 on £300 of rental profits, reduced by £30 of finance-cost relief, leaving £90. Together, their rental income tax is £3,060.

The properties earn the same rent and the lenders receive the same interest. The improvement comes from a genuine change in who is entitled to the business profits. Scottish taxpayers need different calculations, and a change part-way through a tax year will not produce a full year’s saving.

Future years also need their own modelling. The property-income changes from April 2027 introduce separate 22%, 42% and 47% rates and a 22% finance-cost reduction for taxpayers within that regime. Devolved income-tax rules must also be checked. The illustration above deliberately uses 2026/27 rates.

A real partnership, with real rights and responsibilities

Jointly owning rental properties does not automatically make a couple business partners. HMRC’s PIM1035 guidance distinguishes ordinary joint ownership from a property business genuinely carried on in partnership.

The partnership agreement, property arrangements, accounts, tax returns and actual conduct should tell the same story. The agreement should address income, capital, decision-making, liabilities and what happens if a partner dies, retires or wishes to leave. Registration and a signed document are evidence of an arrangement; they cannot substitute for putting it into effect.

This article concerns a partnership between individuals. An ordinary partnership brings personal responsibility for business debts. A 1% profit entitlement should not be mistaken for a 1% limit on liability. Existing mortgages, lender consent and each spouse’s exposure require consideration before changes are made. An LLP involves a different legal structure and further analysis.

How this differs from ordinary joint ownership

For spouses living together who own rental property jointly outside a partnership, the usual starting point is equal taxation. An effective Form 17 declaration can instead reflect unequal beneficial ownership, but it must reflect the actual interests in both the property and its income.

A genuine partnership is different. Under section 836 of the Income Tax Act 2007, Exception C, income within the partnership provisions is excluded from that default rule. PIM1035 confirms that partnership rental income is divided according to the partnership agreement.

The distinction matters when considering a 99:1 profit split. The partnership route allows the income-sharing arrangements to be considered separately from the capital contributions, while still requiring proper examination of the ownership and rights created.

For some couples, ordinary joint ownership, with Form 17 where appropriate, may achieve their objective more simply. A useful review should compare that route with a partnership, including the initial costs, ongoing administration and longer-term consequences.

The settlements rules: an interest in the business matters

The settlements legislation can attribute income back to the person who provided the assets or arrangement producing it. However, section 626 of ITTOIA 2005 provides an exception for qualifying outright gifts between spouses and civil partners.

In TSEM4215, HMRC explains that the exception can apply where the incoming spouse receives an unconditional interest in partnership assets and income. Its examples distinguish a genuine gift carrying capital rights from an arrangement that gives a spouse income while reserving all capital profits to the original owner.

For a proposed 99:1 arrangement, the spouse’s interest must therefore be examined as a whole. A profit-sharing clause does not, by itself, establish that the outright-gift exception applies. The nature and value of the capital rights, any restrictions and the surrounding arrangements matter.

Redirecting rent into your spouse’s bank account is not enough. The entitlement must be real, and an arrangement consisting wholly or mainly of a right to income needs particular scrutiny.

Capital gains tax when the partnership is formed

A transfer of an interest in a rental property is normally a disposal for capital gains tax purposes. For spouses or civil partners living together, section 58 TCGA 1992 generally gives no-gain/no-loss treatment, as explained in HMRC’s CG22000 guidance.

In practical terms, a qualifying transfer to your spouse usually produces no immediate CGT bill. The transferred interest carries its existing tax history forward; the accumulated gain is not wiped away.

The CGT analysis must follow the actual property interests and capital entitlements transferred. It cannot be calculated simply by looking at the 99:1 income-profit split.

That spouse treatment should not be assumed for an unmarried couple, a company joining the arrangements or a transfer to children. Nor does a favourable CGT result establish the answer for stamp duty or its devolved equivalents.

SDLT, LTT and LBTT when properties enter the partnership

There is no general land-tax exemption simply because a couple are married. Even a gift outside a partnership can involve taxable consideration where mortgage debt is assumed: HMRC explains the SDLT debt rules here.

For qualifying transfers into a partnership, special rules calculate the amount on which tax is charged by reference to market value and the sum of the lower proportions, usually shortened to SLP. The broad formula is:

Chargeable consideration = market value × (100 − SLP)%.

That is the amount to which the applicable land-tax rates are applied, not the tax bill itself. An SLP of 100 gives zero consideration under the formula; an SLP of 60 on a £500,000 interest gives £200,000 of consideration.

HMRC’s SDLT calculation identifies the owners before the transfer and their corresponding partners afterwards. It apportions the former ownership between those partners, compares each allocation with the relevant partnership share and adds the lower figures. Connected-person rules, including those for spouses, affect the calculation.

For example, suppose Alex owns the entire property before transferring it into the partnership. Afterwards, Alex’s income-profit share is 1% and Sam’s is 99%. Because they are spouses, Alex’s former 100% ownership can, for this calculation, be apportioned 1% to Alex and 99% to Sam as corresponding partners. Comparing those allocations with their respective partnership shares can produce an SLP of 100 and nil SDLT consideration.

This is a conditional application of the statutory calculation. The apportionment used in the calculation does not itself transfer ownership or settle their capital rights.

The Welsh Revenue Authority’s partnership guidance and Revenue Scotland’s LBTT7002 guidance explain their respective SLP calculations. Their legislation, anti-avoidance provisions and reporting requirements must be applied separately. Scottish property law also requires its own review.

Where GAAR and DOTAS fit

The UK General Anti-Abuse Rule, or GAAR, concerns abusive tax arrangements. Under section 207 Finance Act 2013, the question includes whether arrangements can reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.

HMRC’s GAAR guidance, Part D, sections D2.2 and D2.3, recognises legislative choices and established practice. Read alongside its spouse-partnership guidance, this supports a distinction between ordinary family business planning and contrived arrangements. It does not give every spouse partnership advance clearance.

The complete arrangements still need checking. SDLT has its own section 75A rules, which do not require a tax-avoidance motive, while Wales and Scotland have distinct general anti-avoidance rules for their devolved taxes.

DOTAS means Disclosure of Tax Avoidance Schemes. It is a separate reporting regime, not another name for GAAR. HMRC’s DOTAS guidance requires consideration of the tax-advantage and main-benefit tests, together with the relevant statutory “hallmarks”. These can concern features such as confidentiality, premium fees or standardised tax products.

A tax saving or an ordinary professional fee does not, by itself, make an arrangement disclosable. Equally, commercial reasons or references to an HMRC manual do not automatically remove a disclosure obligation. The actual advice and arrangements should be assessed. Disclosure does not establish that planning works, and non-disclosure does not provide HMRC approval.

Could the partnership incorporate later?

A rental partnership may later consider transferring its business to a company for reasons such as succession, business continuity, retaining profits or reorganising finance. That should be a fresh decision based on its circumstances at the time.

Section 162 TCGA 1992 can defer capital gains when a qualifying business is transferred to a company. Broadly, the conditions require a going concern, transfer of all business assets apart from permitted retention of cash, and consideration wholly or partly in newly issued shares. Relief generally reduces the tax cost of those shares; it does not simply cancel the gain.

Partnership status alone does not establish eligibility. HMRC’s guidance on the meaning of a business, reflecting Ramsay v HMRC [2013] UKUT 226 (TCC), requires consideration of the activities actually undertaken. Its reference to 20 hours is not a statutory minimum: fewer hours can still qualify on the facts.

HMRC also confirms that relief is calculated separately for each partner. Their capital interests and the consideration they receive must be examined. A 99:1 income-profit split does not, by itself, determine either the allocation of capital gains or the company shares each spouse should receive.

Non-share consideration can restrict relief, and the treatment of mortgages, refinancing and business liabilities requires particular care. Extra-Statutory Concession D32 can address qualifying business liabilities taken over by the company, subject to its terms. It is not blanket permission to extract value tax-free.

For transfers from 6 April 2026, a satisfactory claim is required. Our separate explanation of the Section 162 claim requirements covers that change.

Property118’s pause on assisting with Section 162-related incorporations remains pending judicial clarity. Explaining a potential future option does not make incorporation the recommendation today. A partnership should be worthwhile for the couple’s present circumstances in its own right.

The land-tax calculation must be done again on incorporation

Section 162 concerns CGT. It does not grant relief from SDLT, LTT or LBTT.

When property leaves a partnership for a connected company, the relevant transfer-out rules require a fresh SLP calculation. For SDLT, Schedule 15, paragraph 20, explained by HMRC, starts with the owner after the transfer, usually the company, and identifies corresponding partners before it. Company control and connected-person rules matter; the calculation is not simply a comparison of shareholding percentages.

Suppose the review establishes that Alex and Sam are each connected with the receiving company and that their attributable partnership shares for this calculation are 1% and 99%. The company’s 100% interest can then be apportioned 1% to Alex and 99% to Sam. Comparing those allocations with their attributable partnership shares can produce lower proportions totalling 100 and nil consideration under the formula.

However, the attributable shares must first be established. The starting concept is a partner’s share of income profits, with historical ownership and tax-payment conditions explained by HMRC. Changes to partnership interests, previous transfers, unpaid tax or wider arrangements can change the result. A current 99:1 agreement is not enough to determine that history.

HMRC’s company-transfer example also shows why the partnership provisions must be considered alongside the connected-company market-value rules.

Wales has its own transfer-out provisions in the linked Schedule 7 guidance; Scotland explains its calculation in LBTT7003. A nil charge on formation does not guarantee a nil charge on incorporation.

There is also a helpful positive example in HMRC’s SDLTM09390. Three established property-business partners decide to incorporate to reduce risk. On the facts described, HMRC says section 75A does not apply and the normal partnership provisions determine the SDLT consideration. The example supports a later commercial decision to incorporate; it does not approve a prearranged sequence of transfers.

There is no universal rule that running a partnership for two or three years makes incorporation tax-free. Specific time limits, withdrawals of capital, changes in ownership and any arrangements already in contemplation must be examined under the applicable rules.

What a review should establish

The starting point is your household income requirement, your plans for the properties and the current ownership and borrowing arrangements. The analysis should compare the existing position with suitable alternatives, consider an appropriate profit split and calculate the potential household savings.

It should also examine the capital rights each spouse would hold, the settlements position, CGT, the relevant land tax, anti-avoidance and disclosure considerations, and the practical work needed before any changes are made.

You should come away understanding whether the likely benefit justifies the initial and ongoing costs, what rights and responsibilities each spouse would acquire, and how the decision fits your longer-term plans. Where specialist input is appropriate, we will introduce the relevant professionals. Legal implementation, conveyancing, lender charges and ongoing accounting are separate matters to be scoped and quoted.

If one of you is bearing a substantial rental tax bill while the other has spare lower-rate capacity, request a Property118 consultation. Establishing whether a properly structured partnership could improve your household income may be a useful first step towards making the properties work better for your family’s future. The savings could be put to solving the problem of whether your family could afford to keep your property portfolio?

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