Newsletter Spring 2017

Jointly held let property

From 6 April 2017, if you let residential property as an individual, you won’t be able to deduct all of the finance costs from your rental income. This blocking of deductions for loan interest and other finance charges is to be phased in over four years.

Where your let property is mortgaged, you will be taxed on the rental income before deduction of interest charges. Your marginal tax rate may increase to 40% or 45%, and you could make a real loss after paying tax. Where your family receives child benefit, that could be clawed back in full as a result of your higher taxable income.

A partial solution to this problem is to give a share in the let property to your spouse or civil partner. Such a gift won’t attract Capital Gains Tax if you and your spouse are living together during the year of the gift. The aim is to spread the income from the let property over two basic rate tax bands, and two personal allowances, to reduce the total tax payable.

For maximum flexibility, the property should be held as 'tenants in common', so you can determine the exact share in the property that you each own; say, 10% and 90%. Your solicitor should draw up a trust deed which states who holds which share (or 'beneficial interest') in the property.

If you want to be taxed on the property income in line with your beneficial interest, you and your spouse need to submit an election on Form 17 to HMRC, and include a copy of the trust deed. Without the Form 17 election you will both be taxed on 50% of the income from your jointly held property, whatever your underlying beneficial interest.

You can’t submit a Form 17 election if the property is held as 'joint tenants' rather than as 'tenants in common'.

Legal advice should always be taken when changing the ownership of a property and, where the property is mortgaged, the permission of the lender will be required.