Jointly let properties: A reminder of the special rules
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
1 September 2023
With some taxpayers falling foul of the rules, we have prepared a reminder of the special rules on jointly let property, which particularly relate to those who are married or in a civil partnership.
HMRC sets out the special rules for jointly let property in its property income manuals. According to these rules, the treatment of property let jointly by one or more taxpayers is dependent on whether the property is simply co-owed between the parties or whether a partnership exists. The simple act of renting property together does not in itself create a partnership.
Where property is rented by a partnership
Subject to any other tax provisions to the contrary (such as the treatment of notional profits or the mixed partnership rules), profits/losses from a partnership rental business should be allocated in accordance with the provisions of the partnership agreement.
A partnership rental business is treated as a separate rental business from the partners as individuals, or from any other partnership that the partners may be a member of. Because they are separate rental businesses, the profits from one rental business can’t be offset against the losses of another rental business.
Very often, where rental income is received by a partnership, it will be incidental to a more substantial trading business. In that case, the rental income would be shown separately in the partnership tax return, although there are special rules that can enable the renting of accommodation that is temporarily surplus to be treated as trading income in some circumstances.
Prior to basis period reform, it was possible to use the basis period of the trading business where a partnership received rental income that was incidental to the main trade, where the year end was not 31 March or 5 April. Going forward, basis period reform will require all trading income to be assessed on a tax year basis, rather than a current year basis.
Where property is not rented by a partnership
In cases where property is merely jointly let by two or more individuals, each individual would report their share on their self-assessment tax return as part of their rental business. Unless the joint owners are married or are in a civil partnership (see below), the share allocated to each owner will normally be based on their percentage ownership of the property. Although it can be possible for joint owners who are not married or in a civil partnership to agree a different allocation of profits/losses.
Where joint owners are married or in a civil partnership
Section 836 ITA 2007 outlines special rules for situations where joint property owners live together and are married or in a civil partnership. The default position is that spouses or civil partners are treated as if they own the property equally, with rental profits or losses being shared equally.
There are a few exceptions to this default position, including where the property is rented out as a furnished holiday letting, is rented out as a partnership (see above), or where beneficial ownership is different to 50% each and an election is made under Section 837 ITA 2007.
The Section 837 election is available where the beneficial interest in the income is the same as the beneficial interest in the property being rented. The election is made via Form 17, which can be accessed from the HMRC website. The legislation requires the election to state the income covered by the election and the property from which the income is received. If a new property is acquired at a later date, a further election would be needed if the couple wished for it to be covered.
HMRC manual TSEM9846 explains how the Section 837 election is optional. It uses the example of where there is a property that is owned 90% by one spouse or civil partner and 10% by the other. They do not have to make the election, in which case the rental profits and losses would be split equally.
HMRC stresses that any Form 17 election must reflect the commercial reality. This means that couples who are married or in a civil partnership can’t elect to have an allocation other than 50/50, unless a non 50/50 split reflects their beneficial ownership.
When submitting Form 17, it is necessary to provide evidence that the beneficial ownership is not equally split between the couple. Couples may wish to make a further election where their beneficial ownership subsequently changes.
ICAS has recently given HMRC feedback on the limitations of the current form, as we feel that it has not been designed as helpfully as it could be. It is necessary for the person completing the form to have all the details to hand, as it is not possible to move onto later sections of the form until earlier sections have been completed. We feel that this makes it more difficult for taxpayers who are married or in a civil partnership to comply with their obligation to submit Form 17 where they wish for rental income to be taxed based on their beneficial ownership of the property (when this is not equal). We also feel that it does not provide details of how taxpayers who need additional support can obtain the assistance they require .
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We welcome members’ input to inform our work on consultations or other tax-related matters – email us to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.