Joint Ownership – Buy-to-let
Where property is jointly owned by two or more persons, each must include his share of the income and capital gains as part of his personal property income.
In England and Wales a property can be registered as joint tenants (where each owner holds an interest in the whole of the property) or as tenants in common (where each owner holds a separate identifiable share of the property). If a married couple or civil partners own a property, the income from that property must be split equally between them for tax purposes if they are joint tenants.
Where the property is held as tenants in common in unequal shares, an election can be made to H M Revenue & Customs to have the property income split in the proportion that reflects each partner’s beneficial interest in the property.
Where the joint owners of a property are not married or in a civil partnership they can agree to share the income from the property in whatever ratio they choose although this profit sharing ratio would normally reflect the underlying beneficial ownership of the property.
In contrast, if the joint owners hold the property in partnership, the partnership itself is treated as carrying on its own property business and the individual partners will need to keep their share of the partnership property income completely separate from their own property income – so a loss on the individual’s personal property business cannot, for example, be used against his share of the partnership property income.
If the property is let furnished, you can currently deduct a wear and tear allowance equivalent to 10% of the rent after provision for any item of expense borne by the tenant such as council tax, water rates and heating bills. From 6 April 2016 the wear and tear allowance will be abolished and instead landlords will be able to deduct the actual costs of replacing furnishings in the property. To qualify as furnished residential letting, the property has to be let with sufficient furniture, furnishings and equipment for “normal residential use”. In essence, the property is ready for immediate occupation including all furniture and facilities. As a consequence, partly furnished properties will not qualify for the wear and tear allowance to be claimed.
Furnished Holiday Lettings
Different rules apply to furnished holiday lettings. Such lettings are treated as a trade, not as rental income. To qualify, the property must be available for commercial letting as holiday accommodation for at least 210 days each year and actually let as holiday accommodation for at least 105 days or more. It also should not be let for a continuous period of more than 31 days to the same tenant in 210 days of the year.
When the property is sold tax on, the capital gain can be deferred by buying another business asset and entrepreneurs’ relief can also be claimed to reduce the capital gains tax to 10% when the furnished holiday letting business ceases completely.
Rent a room relief
Up to £7,250 (£4,250 prior to 6 April 2016) of annual income received from letting rooms as furnished accommodation in the taxpayer’s home can be received tax-free. Where the gross income exceeds the annual threshold, the taxpayer can choose to be taxed on either the gross income in excess of the threshold or the whole of the income from the property.
A non-UK resident who invests in UK property is liable to UK tax on the rental income. He is also liable to capital gains tax in relation to gains arising in UK residential property after 5 April 2015. Tax is deducted by the tenant or rental agent from the rents unless the landlord opts to join the Non-Resident Landlord Scheme. It is advisable to opt for that scheme.
A UK resident who lets property located overseas is taxable in the UK on the letting income and capital gains even if, as is often the case, the rental income is also taxable in the country in which the property is situated. The profit/loss is calculated in the same way as for UK property. The overseas letting business is however treated as a separate business from any UK letting income, so a loss on one cannot be offset against a gain on the other. Where tax is paid in the overseas country, the UK will give credit for it against the UK tax on the income. The effect is that you end up paying overall the higher of the UK or the foreign tax. Similarly capital gains on overseas properties are taxable here with credit being given for any overseas tax paid on the gain.
If you would like to discuss these issues further, or any other tax planning opportunities, please get in touch.