Buying a rental property with your partner can seem relatively straightforward. You buy the property together, find tenants, collect the rent and share the profits. However, deciding who owns what share of a rental property is an important part of the process. Your ownership structure can affect how rental income is taxed, your future financial planning and what happens if your circumstances change.
Whether you’re married, in a civil partnership or buying property with an unmarried partner can also make a difference. That’s why it’s worth considering the ownership structure before you complete the purchase.
Should You Own a Rental Property 50/50?
Many couples choose to buy a rental property in equal shares. Where both people contribute equally and have similar financial circumstances, a 50/50 ownership split may be perfectly appropriate.
For married couples and civil partners who live together, HMRC generally treats income from jointly owned property as belonging to each person equally for Income Tax purposes. That means rental income will normally be taxed 50/50, even where the underlying beneficial ownership is unequal, unless the couple meets the requirements to have the income taxed according to their actual ownership shares.
Can You Own a Rental Property in Unequal Shares?
A rental property doesn’t necessarily have to be owned equally. There may be genuine reasons for one person to hold a larger beneficial interest. For example, one partner may have contributed more towards the purchase or the couple may have agreed a different ownership arrangement.
There can also be tax implications. If one partner pays Income Tax at a lower rate, an unequal ownership structure could potentially result in a lower overall tax liability. However, you cannot simply choose a different percentage when completing your tax return because it produces a better tax result. The tax treatment needs to reflect the genuine arrangement and the relevant HMRC rules.
Married Couples, Civil Partners and Form 17
Special rules apply to married couples and civil partners who live together. Jointly owned property income is generally taxed 50/50. If the couple genuinely owns the property in unequal beneficial shares and is entitled to the rental income in those same proportions, they may be able to ask HMRC to tax the income according to those actual shares.
This is done using Form 17: Declaration of Beneficial Interests in Joint Property and Income. Form 17 doesn’t create an unequal ownership arrangement. It tells HMRC about an arrangement that already exists. Evidence of the unequal beneficial ownership must therefore accompany the declaration, and the property and income shares must correspond. This is an area where professional tax and legal advice before changing ownership arrangements can be particularly valuable.
What About Unmarried Couples Buying Rental Property?
The position is different for unmarried couples. The automatic 50/50 rule applying to married couples and civil partners does not apply in the same way. Rental profits will normally follow each person’s entitlement, although jointly owning property can create more complex circumstances depending on the arrangements in place. This can provide greater flexibility, but it also makes documenting the ownership and income arrangements particularly important.
Simply deciding between yourselves who will declare the rental income isn’t enough. The arrangement needs to reflect the reality of how the property and its income are owned and managed.
Decide on Property Ownership Before You Buy
The best time to discuss ownership is before you complete the property purchase. Changing the ownership structure afterwards may have tax, legal, mortgage and other financial consequences. Depending on the circumstances, professional legal advice may also be required.
Planning before completion allows you to consider your respective tax positions, contributions towards the property, future plans and how you want rental income to be divided. Getting these decisions right at the beginning is generally much easier than trying to restructure the arrangement later.
Think Beyond Today’s Tax Bill
Tax efficiency is important, but it shouldn’t be the only consideration when deciding how to own a rental property. You should also think about your longer-term plans. What happens if you sell the property? What if one partner wants to exit the investment? How might your respective circumstances change? An ownership structure that works today should also make sense as part of your wider financial plans.
Buying a rental property with your partner involves more than deciding which property to buy. How you structure the ownership can affect the taxation of rental income and your longer-term financial position. For married couples and civil partners, the default tax treatment is generally a 50/50 split, with Form 17 potentially available where genuine beneficial ownership is unequal. Different rules can apply to unmarried couples, making it important to understand your position before purchasing.
At Greystone Advisory, we can help you understand the tax implications before you buy and work alongside your legal adviser to help you put the right structure in place. If you’re considering buying a rental property with your partner, speak to us before completion. Getting it right at the beginning could make things much simpler later.
