Married Couples & Civil Partners - How Should Property Be Held?
Where a let property is held by one spouse or civil partner, a transfer into joint ownership can help save income tax (IT) on the rental income where one spouse or civil partner pays tax at a lower marginal rate. Such a transfer could also mitigate any S.24 ‘landlord tax’ (restrictions on tax relief on finance costs). Holding property in joint names may also mitigate the capital gains tax (CGT) charge on a future sale of the property.
In England and Wales property can be held as:
• Joint tenants – where the owners hold the property collectively as a whole.
• Tenants in common – where the owners hold identifiable interests in the property. For example, say 75% and 25% of the property.
If the owners are married or are in a civil partnership, they are deemed for IT purposes to hold the property in equal shares, i.e. 50:50 (the ‘default’ position), irrespective of the actual ownership structure. Where a property is held in unequal shares, in order to benefit from being assessed to IT in accordance with the actual beneficial ownership, a valid election (on a Form 17) needs to be filed with HM Revenue & Customs.
If a property is held as joint tenants, it is relatively straightforward to sever the joint tenancy and switch to tenants in common. A Declaration of Trust should then be executed, to support the new beneficial ownership structure. There could however be a Stamp Duty Land Tax charge where the property concerned is mortgaged. The Settlements legislation will also need to be considered.
A ‘gift’ of an interest in a property between spouses or civil partners who are living together is treated as a ‘no gain no loss’ disposal for CGT purposes i.e. no CGT charge arises. The donee is effectively treated as acquiring the interest in the property at the donor’s base cost.
The transfer between spouses/civil partners is also exempt from inheritance tax, unless one spouse is non-UK domiciled.
Professional advice should be sought before any action is taken.
Ward Williams has a team that specialises in the needs of landlords. To find out more please visit our Property section
If you wish to discuss the above, please contact Simon Boxall at firstname.lastname@example.org