It’s Tuesday!
Let’s talk Tax.
Read this week’s short Tax snippet for doctors & dentists, to help you save money and get more organised with your tax affairs. It’s just to give you a flavour – take 5 minutes with your morning coffee to have a read.
Utilising your spouse or civil partners basic rate tax band
If you own a rental property that makes a profit, but you also pay higher or additional rate tax regarding your professional income, you will end up paying higher or additional tax on any rental profits.
Subsequently, if you have a spouse or civil partner that doesn’t pay tax at higher rate, it becomes beneficial for a proportion of the rental profits to be allocated to them, to utilise their personal allowance, or their basic rate tax band.
Transferring ownership
To split the rental profits, part ownership of the property needs to be transferred to the lower earning spouse or civil partner.
However, it may be that you do not want to own the property on a 50:50 basis, so in this case, a nominal ownership can be transferred, even as low as 1%.
The HMRC form 17, should not be signed in this instance. This form is a “Declaration of beneficial interest in joint property and income” and results in property income being taxed at the percentage related to the ownership percentage.
Saving tax on rental profits
To use an example.
Chris and Carol are married. Chris is a higher rate tax payer and Carol is a non-earner. Chris owns a property which earns £7,000 in rental profit per year.
Chris doesn’t want to own the property jointly with Carol, so instead he transfers just 1% of the property to her name.
They don’t submit HMRC Form 17, so the rental income is assumed by HMRC to be apportioned on a 50:50 basis, between both owners.
This set-up will result in a tax saving of £1,400 per year.
This is calculated as £3,500 (50%) of rental profits allocated to Carol, multiplied by 40%, which would have been the tax Chris had to pay at higher rate.
Tax planning is essential to be informed of other strategies just like this one. It is important to have a specialist accountant and tax adviser to help you make important decisions from purchase through to sale.