Whose house is it anyway?
Buy-to-let property can provide a useful source of income, especially in a family where there is one main earner and a spouse who pays lower rates of tax. If the rental income from the let properties is assessed on the lower earner, the family as a whole will pay less tax – the saving can be in the thousands. However, it's important to get the legal position right.
Where a married couple (or civil partners) have purchased a buy-to-let property in their joint names, the net income from the property must be reported in equal shares – 50:50 – on each of their tax returns.
The property can be owned in a different ratio: say the wife owns 90% and the husband 10%. In that case, the income can be split in that ratio. But to do so, you have to make a declaration on HMRC's Form 17. If you don't, the income will still be taxed equally.
You can't just pick any ratio for tax – the proportions must reflect the underlying beneficial interests in the property, and capital gains on a future sale will be split in the same way.
If you declare rental income from joint property on your tax returns in a different proportion (not 50:50) without a Form 17 declaration, you will be open to penalties and interest for errors on the tax returns – even if the ownership is not equal.
This is what happened to Mr & Mrs Koshal. Although they declared all of the income from their let properties on their tax returns, they hadn't filed Form 17, and they should have reported everything as equal. They had to pay more tax, plus interest, and they were charged 30% penalties for getting it wrong.
If you own property jointly with your husband, wife or civil partner, we'll be happy to help make sure you are paying the right tax – and let you know if you could pay less.