Renting out a jointly owned property can provide decent income. It may be jointly owned along with your family member, partner or a friend. It can be complicated to pay tax on jointly-owned properties. There are some things you need to consider before you begin reporting to HMRC, the rental income that you earn together. These are:
- What amount of income tax each person will have to pay
- Each share of the property
- Capital Gains Tax: How it will be applied
- What to do in case of separation
To ensure that all the joint owners enjoy the benefits of ownership, and to avoid disputes, we have provided the guide to the JOINTLY OWNED RENTAL PROPERTIES – TAXATION.
TAX RATE ON INCOME FROM RENTAL PROPERTIES
Your share of income will determine how much tax you have to pay. In general, ownership is assumed to be equal shares. It would therefore be 50/50 if there was more than one owner.
This is except if you have a reason to change the income share. In which case you will need to show that you don’t have equal beneficial interests in the property. For example, a deed or declaration could prove this.
By filing a form 17, you will have to declare beneficial interest in joint property and income. If you are a married couple, or a civil partner, this is the only way to change the beneficial interest ratio other than 50:50.
Your total income for the year will increase by 50% of the profit. If you earn more than your GBP 12570 Personal Allowance, the profit will be subject to tax according to which band you belong. The following tax bands apply as of 2021/22:
| Band | Income subject to tax | Rate of tax |
|---|---|---|
| Personal Allowance | Maximum GBP 12570 | 0% |
| Basic rate | GBP 12571 -GBP 50270 | 20% |
| Higher rate | GBP 50271 – GBP 150000 | 40% |
| Additional rate | More than GBP 150000 | 45% |
Let’s say your salary is currently GBP 46000 You will be subject to a higher tax rate if your 50% rental income is GBP 7000. This means that you will pay 20% tax on taxable income above GBP 12570 and upto GBP 50270 i.e. GBP 37700 and 40% on GBP 2730 earnings over GBP 50270.
RENTAL PROPERTIES – CAPITAL GAINS TAX
Capital Gains tax is tax on any profit made when you sell an asset. Some assets are exempt from tax, but a home that you rent out for profit is not exempt. In order to calculate what you owe in the simplest form, subtract the purchase price, the associated costs, and the costs of selling from the sale proceeds.
Gains must be reported through your Self Assessment tax return. Notably, the Capital Gains Tax allowance covers the first GBP 12300 of any gain in 2021-22. This means that no tax will be due on this. If the property was your primary residence, there are further allowances such as Principal Private Residence Relief or Letting Relief that can reduce your Capital Gains Tax.
You will need to declare rental income to HMRC. This will be a new option for you if you are familiar with PAYE only. In this case, you and your co-owner must register for Self Assessment. This is how HMRC calculates your Income Tax dues.
WHAT HAPPENS IF CO-OWNERS SEPARATE
It all depends on the terms between you and your ex-co-owner. You have the option to sell the property and pay the Capital Gains Tax separately, or continue to receive the split rental income. Except for a sudden change in the mutual beneficial interests, there is no need to alter the income share.
Tax dues should not be different except if your circumstances change. If you are able to equally manage both tenants and property, the financial benefits of renting property together will continue.
