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Reporting rental income to HMRC

In the current climate, where it is increasingly common for individuals to own buy to let property, a question that often arises is how rental income might be allocated between spouses or partners to achieve maximum tax efficiency.

Generally HMRC will expect the income from the property (or the proceeds of any sale) to be allocated for tax purposes to the beneficial owner or owners in the same proportion as their beneficial interest.

It is extremely important here to bear in mind that there are two forms of ownership: legal   ownership and beneficial ownership.

Legal ownership is generally determined by reference to the name or names shown on legal documents and recorded at the land Registry. Beneficial ownership refers to who actually receives economic benefit from the property, usually in the form of occupation of the property, or who receives the rental income.

The difficulty is proving what the beneficial ownership actually is.

Beneficial ownership should ideally be established in advance and cannot be changed retrospectively at the whim of individuals to suit their circumstances at a particular time. It is possible to avoid uncertainty by the creation of a simple trust and we have also seen cases where taxpayers have written to HMRC to place on record what the beneficial ownership is. In circumstances where neither of these actions have taken place, beneficial ownership will usually be established by reference to a number of factors which includes the issues already noted, such as legal title, who occupies the property, who receives the rental income (or sale proceeds) but also who provided funds or borrowed money to buy the property, or provided any security.

It should be noted that where a property is purchased jointly, unless there is evidence to show that the contributions were not equal, it is usually presumed that the purchasers will have an equal interest in the property.  

Unfortunately, this can often have adverse tax consequences, particularly where a property is owned jointly between spouses and one spouse is a higher rate taxpayer and the other is not. From a tax perspective, it is invariably more advantageous for the property to be beneficially owned by the lower earning spouse so that rental income does not attract tax at higher rate.

If you are in any doubt about how you own a property and report income generated from it to HMRC, you should contact us, or any other tax adviser.

Finally, we remind our readers that the HMRC amnesty for landlords is still in place and continues to offer landlords who have failed to declare property income or disposals an opportunity to bring their tax affairs up to date at a reduced penalty of 10% of any unpaid tax. Given that the normal penalty rate in such situations is likely to be at least 30%, this represents a good opportunity to bring tax affairs up to date.