In this excerpt from the report 'Taxation Of Property Partnerships and Joint Ownership', Lee Sharpe explains the taxation aspects of property held in joint names, with joint beneficial interests. Save 40% Today
Aspects specific to property held jointly between spouses and civil partners are dealt with separately below, as are partnerships.
Income tax and joint ownership
In the context of a joint property investment business, each joint owner is normally taxed according to their share of the net property income. PIM1030 states:
“Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses, and so occasionally, the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.” (But see also differing position of guidance now at PIM1020, as noted at 2.1 above.)
So, by default, income will be allocated according to the underlying beneficial ownership of the property, but if there is an agreement in place that income be split differently, then that may be followed – and updated, from time to time. However, it is HMRC’s long-held position that such agreements cannot be applied retrospectively – i.e., it applies to the division of profits from the date of agreement, not to profits received beforehand. This means that, per HMRC, one cannot (for example) wait until after the end of the tax year, tot up the joint owners’ respective incomes from other sources and retrospectively allocate the shares of joint income that is most tax-efficient (see also section 6.6).
Settlements trap (and how to avoid it)
It may be more tax-efficient if rental income is split other than according to underlying beneficial ownership and, particularly in family scenarios, one owner may be prepared to sacrifice some of their beneficial income entitlement so that a relative or close friend may receive more income (for matters specific to joint ownership between spouses and civil partners, please see next below).
This is generally referred to as a ‘settlement,’ and there is specific tax legislation that treats the income given away as still belonging to the settlor (donor) for tax purposes (ITTOIA 2005 Part 5 Chapter 5 s 619 et seq.) However, the settlements anti-avoidance legislation acts to treat the income given away as still belonging to the settlor only where the settlor does or may still benefit. This is deemed automatically to be the case where the income is diverted to a spouse or civil partner, or to a minor child, (who is not married), but if the transfer is not to a spouse, etc., or minor child, there must be arrangements where the money can or will be paid or otherwise used to benefit the settlor (or the settlor’s spouse, minor children, etc.).
In other words, spouses and young children aside, a no-strings agreement to divert income from one party to another should not trigger the settlements anti-avoidance tax legislation, even if it is technically a settlement in general law. Furthermore, spouses and civil partners are caught only where the thing transferred is essentially a right only to income – in other words, where one spouse transfers both the income and underlying capital to the other spouse, unconditionally, then the settlements anti-avoidance legislation will not ‘bite.’
Example 4: Settlements trap
Eric and Ernie are brothers and hold 50% each in their BTL portfolio. They also have other income sources, and it suits the brothers to vary the income split from one year to the next, in advance (since HMRC says such agreements cannot apply retrospectively, as mentioned above). In March 2025, Eric agrees to split the income 40:60 in Ernie’s favour (say) for the foreseeable future. There are no arrangements whereby Ernie channels Eric’s 10% rental profits back to him, or Eric otherwise benefits from the diverted income (e.g., by the profits being channelled to Eric’s spouse).
Eric has settled some of his property income rights on Ernie, but the settlements anti-avoidance legislation will not apply because Eric cannot, in this case, benefit from the income he has settled – he has not retained an interest in the settled property. Unless and until the profit share is revised, Eric will be taxed on 40% of the rental profits and Ernie on 60%.
Note, however, that in this simple example, Eric is still entitled to change his mind and demand 50% of the profits from some point in the future if he wants to – that is a fundamental aspect of his 50% beneficial ownership – and it is open to him to assert that right, should he wish to do so. In order to effect a permanent change (from 50:50 to 60:40), Eric would have to make an outright gift to Ernie of some of his beneficial interest in the underlying property (and that might have other tax implications, such as for capital gains tax – see also 3.2 below).
