“I don’t receive any of the rental income so I don’t need to declare it to HMRC”
When a property is owned jointly by spouses or civil partners, the assumption from a tax perspective is that the property is owned equally by each spouse. Consequently, if the property is let, each owner should report half of the rental income (less expenses) on his or her tax return.
It is tempting, if one spouse has a lower income than the other, for the couple to informally agree that the lower earning spouse should receive all of the rents. Whilst this is fine from a practical point of view, HMRC will nevertheless expect each spouse to declare their half of the income on their tax return.
To avoid this, the couple could buy the property in different shares or make a formal transfer between themselves (documented by deed of gift) in order to achieve an underlying ownership split which could, provided the relevant documents are filed with HMRC, reduce their overall tax liability on the rents. However, advice should be taken as this may have other consequences, for example inheritance tax and stamp duty land tax complications.
“HMRC will never know”
HMRC’s ability to cross-check information from various sources should not be under-estimated. They have access to Land Registry details which would show them when a property is held in joint names and so they will expect to see rents being declared by both parties.
Furthermore, the new reporting requirements for capital gains tax purposes which require each owner of a property to make a declaration of gains on sale within 30 days is another trigger which may prompt HMRC to check that both owners have been declaring rental income.
“The annual property costs are far more than I receive in rents, so I don’t need to mention it in my tax return”
It is not correct to assume that, in a situation where the expenses of a property exceed the rents received, the position does not have to be declared to HMRC.
Rental income must be declared to HMRC on a tax return if, for the tax year in question, it is either £2,500 to £9,999 net after allowable expenses, including the interest element only of mortgage repayments OR the gross rents received before expenses are over £10,000.
“I spent a fortune on the property before I let it and I haven’t yet recouped this in rents”
Whereas some pre-letting costs can be deducted from the first year’s rental income, the scope for this is limited, especially when it comes to repairs and renovation costs.
Expenditure which enhances the value of the property, such as an extension or loft conversion, would not be deductible from rents (although a deduction for this may be made when the property is sold, potentially reducing the capital gains tax bill).
Furthermore, if the property was not in a fit state for letting when purchased, expenditure to bring it up to the necessary standard will not be deductible from rental income.
If you are buying a property for letting or are involved in advising clients who are doing so, please take advice at the outset; it could avoid unpleasant surprises further down the track.
Author Claire Charlton, Personal Tax Partner at Ryecroft Glenton