Tenants in Common, Saving Tax and Tax Planning
Being tenants in common with joint property ownership could save you tax. It will save tax if one partner has no income or is not fully using their 20% tax threshold. HMRC have special rules for married couples and those in civil partnerships. So if you own a property in single name you can make a transfer to your partner without incurring any type of tax liabilities. The Income tax Act 2007 s836 allows married couples and civil partners who are living together to have their income taxed on joint property in equal shares. So if you have bought property in joint names and done nothing else s836 applies to you automatically. Unfortunately s836 does not apply if income is from a furnished holiday let.
The above situation describes what is known as joint tenants. There are some interesting features to being a joint tenant.
- Each tenant has equal right to the property
- Tenants cannot put their share in a will
- On death of a tenant their share automatically goes to the living tenant
- A tenant cannot sell or re-mortgage without the others consent
Holding property as tenants in common | Saving Tax | Tax Planning
You can agree to allocate income in an unequal way. If you do this then you are called tenants in common. There are other things to consider than tax. Some things to note about tenants in common.
- A tenant can sell their share without consent from the other tenants
- A tenant can re-mortgage their share without consent from the other tenant
- On death of a tenant their share does not automatically go to the living tenant
- It’s important to have a will in place to ensure that a tenants share is passed to the right person as well as save on inheritance tax.
- Tenants in common ceases on divorce or separation for a whole tax year
- You can change the profit split by submitting a new form 17, very useful as a tax planing tool.
You can become a tenant in common by informing HMRC using form 17. In this form you should tell HMRC in what shares you intend to take profits. You also have to send documents that evidence your agreement to share profits unequally and this is normally done via a deed of trust.
A case study of how becoming a tenant in common can save you tax.
Partner 1 earns £40,000 and partner 2 earns £6,000 part time. Profits from property are £15,000.
In this situation it doesn’t benefit the couple to split profits equally as it will take partner 1 into the 40% tax bracket. Partner 1 should only receive profits of £3,000 so that they remain in the 20% tax band the rest should go to partner 2. So the profit share should be partner 1 – 20% and partner 2 – 80%. This new profit split will save the couple £1,800 income tax.
This article is meant ONLY for those married or in a civil partnership.
The Finance Equation Ltd are property tax specialists and commercial property finance brokers. We are preferred suppliers for the Essex Property Network. Call us on 020 3086 7472 to see how we can help you save money and increase your wealth