How to Share House Income Without Selling

Navigating the complex world of property ownership, sharing, and taxation can be daunting. If you’re thinking about sharing the income from a house you jointly own, or considering a change in how that income is divided, there’s plenty to consider. The Telegraph answers a reader’s question on the subject.

The Dilemma: Sharing Profits While Retaining Ownership

Clive, a reader, presents a common concern: He and his daughter jointly own a house in Dorset, each holding a 50% stake. While his daughter is keen to let out the property, Clive doesn’t need the rental income. However, he wishes to keep his half of the ownership. The problem? The projected rental income might push Clive’s earnings over the 40% income tax bracket.

Clive wonders if they can arrange for his daughter to claim all the rental income for tax purposes, while both maintain an equal ownership in the property. Can it be done without attracting undue attention from the taxman?

Legitimately Diverting Your Taxable Income

Before diving into solutions, let’s address a common concern. Is it morally right to arrange one’s finances to minimise tax liability?

In 1929, Lord Clyde remarked that every individual has the right to arrange their finances to reduce their tax burden. The Inland Revenue (now HMRC) will always work to maximise tax collection, but it’s equally legitimate for individuals to protect their wealth, provided they act within the law.

Solutions and Strategies

For Married Couples or Civil Partners

If you’re married or in a civil partnership and jointly own a property, HMRC assumes the rental income is split according to ownership: typically 50/50. But, there’s a way to declare a different distribution of profits. Using the HMRC Form 17, couples can state their desired income split. However, there’s a catch. The declared split in profits must mirror the actual ownership share. So, to split income 90/10, ownership must also be 90/10.

For Others: Declaration of Trust

In Clive’s case, since he’s not married to or in a civil partnership with his daughter, they have more flexibility. According to the HMRC’s Property Income Manual, joint property owners (who aren’t in a formal business partnership) can decide how they divide rental profits, even if this doesn’t align with property ownership percentages.

This means Clive and his daughter can create a declaration of trust, confirming that while the house ownership remains 50/50, all rental profits will go to the daughter. Although not mandatory, it’s prudent to inform HMRC of such an arrangement within 60 days of signing the declaration. Additionally, this profit share should be stated in both their annual self-assessment tax returns.

A Final Thought: Looking at the Bigger Picture

While it’s clear that Clive can divert his half of the rental income to his daughter, he should also ponder the broader implications. The house is a significant capital asset. By retaining his 50% ownership but not drawing any income, he’s potentially amassing a considerable inheritance tax bill for the future.

Transferring the house’s beneficial share – or even the full property – to his daughter might be worth considering. But there’s a caveat: reducing one tax can sometimes increase another, like the potential capital gains tax upon disposal of the property.

In Conclusion

Navigating property ownership and income distribution can be complex, but it’s crucial to understand your options and rights. With proper guidance and careful planning, you can make decisions that benefit both your present financial situation and your future legacy. Always consider consulting a professional to get tailored advice.