Shifting Income Between Couples To Pay Less Tax
Who qualifies for income shifting?
If you are a landlord living with a spouse or civil partner with income from jointly owned property, you are generally taxed on an even split of the income. Income shifting moves the tax burden around by matching the income split to your share of property ownership.
You register the change with HM Revenue & Customs by filing a Form 17 and declaration of trust.
You can make the change if:
- You own the property with a spouse or civil partner as tenants in common in unequal shares, like 60:40 instead of 50:50
- The property is a buy to let
- You are entitled to the rental income in proportion to the unequal shares
You can’t get income shift if:
- You are not entitled to the rental income
- You are in a business partnership
- The rental property is a holiday let
- You receive the rental income as a dividend as a company shareholder
Benefits of income shifting explained
Alan and Nicole are married and own a portfolio of five letting properties, giving them a £30,000 rental profit each year. Alan is a higher rate taxpayer (40%), while Nicole pays income tax at the basic rate of 20%.
As joint tenants, they are each taxed on 50% of the profits.
- Alan’s tax on his share of the profits is £15,000 x 40% = £6,000
- Nicole’s tax on her share of the profits is £15,000 x 20% = £3,000
- The total tax the couple pays on their rental profits is £9,000
Their accountant notices Nicole still has £12,000 of her basic rate banding unused and suggests a change in property shareholding. The file a Form 17 and declaration of trust to shift the shareholding from 50:50 to 10:90 in favour of Nicole.
- Alan’s tax on his share drops to £3,000 x 40% = £1,200
- Nicole’s tax on her share rises to £27,000 x 20% = £5,400
- The total tax the couple now pays on rental profits is £6,600
Filling in Form 17
Form 17 can be completed online on the HMRC website.
You will need some information to hand:
- The property address and postcode and the type of property – i.e. residential house
- Do check the ownership share you are switching to adds up to 100%
- The names and relationships of the tenants in common
Proving the change of ownership
To make shifting income work, you must provide HMRC with formal evidence of the change in the property’s ownership. This is usually shown with a declaration of trust drafted and witnessed by a lawyer. As an independent professional, a lawyer’s declaration is the best way to prove the change has occurred.
Income shifting points to watch
The best time to shift income is at the start of a tax year. This avoids complicated calculations to allocate the income to two different shareholdings during the same tax period. Your tax office must receive Form 17 and a declaration of trust within 60 days of signing. Otherwise, the application is invalid, and the property shareholding does not change. If your finances change, you can shift the shares of ownership as often as possible by filing a new Form 17 and a declaration of trust.
If the property is mortgaged
Income shifting between spouses or civil partners does not impact any mortgage against the property – but you may have to pay stamp duty if the value of the transferred share is above the 0% Stamp Duty Land Tax (SDLT) banding. SDLT is not due on transfers worth up to £500,000 until April 2021, but this falls to £125,000 on April 1.
What happens to Capital Gains Tax?
There is none, as, under Capital Gains Tax (CGT) rules, property transfers between spouses and civil partners are exempt. But CGT is still due when the property is transferred to a non-spouse, to a civil partner or sold on. CGT is then based on the difference in value between when the property was first owned by the other partner and the date of sale.
For example, Alan and Nicole bought their letting portfolio in 2010, and Alan transferred 40% of his half of the properties to Nicole. On purchase, Alan’s share was worth £200,000. On transfer to Nicole, they were worth £250,000; when Nicole sold them, the value was £300,000. She pays CGT on the gain of £300,000, less £200,000 or £100,000, not the gain from when she took over ownership.
What if a company owns the property?
Income shifting with a Form 17 does not apply to a company. It’s more accessible to income shift by restructuring the company’s shareholding, so one shareholder receives a bigger payout than another.
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Tax is an aspect of residential property investment which is often overlooked. There are many twists and turns to consider at all levels, whether for income tax, capital gains tax or inheritance tax. It is vital to get the ownership structure right and ensure that all tax relief, allowances, and claims are made.