Lawyers are urging married couples to change how they split rental profits to lower tax bills.
HM Revenue and Customs (HMRC) is looking at rental properties that are jointly owned by a husband and wife who do not equally split rents to make sure a higher rate taxpayer is not avoiding tax by shifting income to their partner.
The rules that set out what is and is not permitted are clear, warn solicitors Smith & Williamson, but failing to follow them could result in a tax investigation.
The principle is the taxpayer cannot decide how to divide up rental profits to pay the least tax without following a legal process – and switching profits from a higher rate taxpayer to a partner paying at a lower rate could be considered tax evasion.
“It is legally allowed to split rental profits in a share other than 50:50 between married couples, but this must be done in the correct way,” a spokesman explains.
“Not following the correct procedure could land partners in trouble with HMRC.”
Sharing rental profits
The default split for rents from a buy-to-let property owned by a husband and wife is 50:50 for couples purchasing homes as joint tenants.
Couples on different tax rates can switch the profits – but only when they own the properties as tenants in common. Under this arrangement, the couple can dictate the percentage ownership of the property.
This allows the higher rate taxpayer to reduce their share in favour of the lower rate taxpayer to cut their tax bill.
To do this, the couple must provide evidence to support the claim for unequal beneficial ownership, such as a declaration of trust. This must be submitted to HMRC with a special form.
The declaration has to specify the percentage ownership.
Once signed and dated, the form must reach HMRC within 60 days and is then effective from the date of signing.
Switching ownership shares works for married couples and civil partners as the transfer is exempt from capital gains tax – while unmarried owners may face a bill for the transfer.