Own a rental property? Want to save tax? Read on…

Written by Claire Thompson | Wills, Trusts, Tax and Probate team |20 September 2023

It’s often said that the only certainties in life are death and taxes but, while taxes may be a certainty, the amount of tax you pay isn’t set in stone.

Effective tax planning can be used to ensure that your tax liability is minimised.

If you own a property that is rented one way to do this is to look to change the ownership of the property, to alter who receives the income.

Benefiting for a spouse/ civil partner’s lower tax rate

If you are a higher rate taxpayer and your spouse or civil partner isn’t then you may want to divert some of the income from the rental property to them to reduce your overall tax bill.

Regardless of the actual ownership, unless you tell the taxman otherwise, they will tax the income based on a 50/50 split.

This means that you can give your spouse/ civil partner a small percentage of the property (e.g. 1%), but 50% of the income would be tax at their tax rate.

If you want to go further, so that more on the income is taxed at their rate then you can look at gifting them a larger proportion, but to have the property taxed on those proportions you have to make an election to HMRC.

How do I do it?

So, you have decided this works for you, how do you go about making the change?  The usual way is to prepare a short trust document confirming the ownership percentages of the property. You may also need to update the Land Registry to add both of your names onto the title.

If you don’t want your spouses’ name to go on the Land Registry title, you can just do the declaration of trust, but then the trust will need to be registered on the Trust Registration Service (TRS).

Is there anything else I need to consider?

The good thing about transfers to spouses/ civil partners is that there are no Capital Gains tax or Inheritance tax charges in most cases.

If the property is mortgaged, you may need to check whether this is allowed by your mortgage provider, and if your spouse/ civil partner is taking on some of the liability for the mortgage you do need to be careful as the value of the element they are taking on could be subject to Stamp Duty Land Tax (SDLT).

You also need to remember this is a gift, and you are giving away a share of the property, so your spouse/ civil partner will be the owner of that percentage of the property.  Although they could choose to give that share back, you can not require it, so it is important to remember those birthdays and anniversaries!

Could this also reduce my Capital Gains Tax bill on sale?

Yes, as the amount of Capital Gains Tax (CGT) you pay is based on your tax rate, so giving a property or part of a property to your spouse/ civil partner who is a lower rate tax payer can reduce the bill.  This is because, as mentioned above in most cases if you gift a property to your spouse there is no Capital Gains Tax to pay, and they basically take over your position, so when the property is sold not only will you be able to both benefit from your own individual personal CGT allowance the subsequent gain for the lower rate tax payer could be changed at a lower rate as well.

This doesn’t work for me, are there any other options?

As with all tax planning there is no one size fits all.  There are other ways of mitigating taxes, such as through you use of corporate structures or trusts that may be more suitable for your situation.

As with most things, the sooner you look at the options the more flexibility you have.  So if you look at how to structure matters at the time you buy the property you will have lots more options than after you have purchased it.

It is always important to get professional advice bespoke to your situation and at Nash & Co we can discuss your situation, what you want to achieve and then set out the options available to you.  We can also work with your accountant and/ or other advisors as well.

If you would like advice on tax planning or are interested in finding out more, please call our expert Wills, Trusts, Tax and Probate team on 01752 827067 or email wills@nash.co.uk.