If one spouse owns rented properties in their own name but is a ‘higher’ or ‘additional’ rate taxpayer and the other spouse is not, it would be beneficial for at least some of the rental profit to be taxed on the spouse.
To alter the income tax percentage charged, ownership of part of the property must be transferred into the spouse’s name.
Should the owning spouse not wish to transfer any material percentage ownership but still wishes to reduce their tax bill, a nominal amount of, say 1% could be transferred.
In this instance the HMRC form 17 ‘Declaration of beneficial interest in joint property and income’ must be signed because not signing will ensure that the underlying property ownership is 99:1 but the income split is 50:50
Example – Joint spouse ownership
Paul and Jane are married. Paul owns a property yielding of £8,000 annually. Paul is a 50% ‘additional’ rate taxpayer and Jane is a non-taxpayer.
Paul transfers 1% of the property ownership to Jane, retaining 99%. Each will be taxed on 50% of the income. As Jane is a non-taxpayer this will produce a tax saving of £2,000.
‘Wear and Tear’ Allowance
The ‘wear and tear’ allowance can only be claimed on rental property let furnished when it includes items such as a cooker, fridge, sofa, etc.
The allowance cannot be claimed on unfurnished or partly furnished properties.
The claim is an annual allowance calculated as 10% of the new rental received after deducting any costs paid for by the landlord which are normally the tenant’s burden – such as council tax.
‘Wear and Tear’ Allowance – Example
Andrew lets out a fully furnished property at a rent of £700 per month.
Out of this £700 he pays £100, being the cost of the utility bills and the gardener each month.
Andrew is allowed to claim ‘wear and tear’ allowance as follows:
Annual income = ( £700 – £100 per month) x 12 months = £7,200
‘Wear and tear’ allowance claim: £7,200 x 10% = £720
For further details on tax allowances for properties, please contact our ‘buy to let’ specialist Mike Doherty.