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August 31st 2020

Property taxation: allocating profits and losses to property owners

When a property is owned jointly, you might expect the rental profit or loss can be split between the owners in any proportion as agreed between them. Indeed, for owners who are not married or in a civil partnership with each other, and jointly own property which they rent (either on long-term lets or as furnished holiday accommodation), they can agree to split rental profits/losses in whichever way they choose - this applies even if the joint owners are co-habiting or are relatives – which may be in the same proportion as the property is owned, or they may have some other way of determining the proportion, e.g. allocating most or all of the profit to the individual who usually deals with the property.

For some joint owners, they may wish to have the flexibility for the rental profit to be allocated to the person who pays tax at the lowest rate, in order to save income tax overall, however, where the joint owners of a property are married or civil partners, profits/losses must be treated as split 50:50, unless any one of the following applies:

  • entitlement to the property, and the income from it, is different; or
  • a partnership exists; or
  • the property qualifies as a Furnished Holiday Let.

What if the actual beneficial interest in the property is not 50:50?

If entitlement to the property, and the income from it, is not 50:50, the owners can declare the actual ‘beneficial interest’ to HMRC, by way of ‘Form 17’.

This declaration cannot be backdated, but once approved by HMRC, profits/losses arising on the property can be split in the actual ‘beneficial interest’ proportion, rather than 50:50.

It is worth noting that when the property is sold, the same ownership proportion will be used for Capital Gains Tax purposes, although it may be possible to utilise the spouse-to-spouse exemption should you wish to change the ownership proportion prior to a future sale of the property.

How about property partnerships?

Profits/losses arising from a partnership can be split in any proportion as agreed by the partners.

There may already be an existing trading partnership which also lets some of its land and buildings (e.g. a partnership with a farm trade, which also has grazing lets on the partnership’s surplus land), and this would be treated as partnership income.

Or, there may be a partnership which runs an investment business consisting only of the letting of property. Whether a partnership exists depends on the circumstances in each individual case, but HMRC are unlikely to accept that two or more people owning and renting a property on long-term let to one tenant constitutes a partnership. In determining whether a partnership exists, you must consider the amount of business activity involved and whether this amounts to a partnership or just merely two or more people letting property; for an investment business to constitute a partnership, HMRC would expect the degree of business organisation to be similar to that of an ordinary commercial business – this might include multiple properties/tenants, and/or additional services being provided.

Furnished Holiday Lets

Profits/losses arising from furnished holiday lets can be split in any proportion, however, there are strict criteria to determine whether a property qualifies as a Furnished Holiday Let for tax purposes.

To qualify as a Furnished Holiday Let, the property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year concerned, and must be actually let commercially as furnished holiday accommodation for at least 105 days in the tax year. You are not able to count any days that you are staying in the accommodation as either ‘available’ or ‘let’ days, and you also cannot count days on which you let the property to friends or relatives at reduced rates, since this would not be a commercial let. Any days where someone stays in the property for more than 31 consecutive days cannot be included as let days, unless a shorter stay was booked, but the 31 days was exceeded due to exceptional and unforeseen circumstances - and if the total of all lettings which exceed 31 continuous days is more than 155 days in the tax year, the property will not qualify as a Furnished Holiday Let.

If the property doesn’t meet the required number of days let in one tax year, it may be possible to make an ‘election’ based on it qualifying in one of the two previous tax years, provided a genuine attempt to meet the minimum days let requirement has been made.

If you would like to discuss any of the points in this article, contact us today.

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