Have you bought, or are thinking of buying, an investment property for your child to live in while they are at university?
Are you an unmarried couple who jointly own property and let it out to tenants?
If you fall into either of these categories, and are joint landlords, here's how you can avoid landlord tax.
Many people assume that if an investment property is owned jointly, the rental income will have to be shared according to what proportion of the property each landlord owns.
For example, if joint landlords own a property 50:50, then you may think that the rent will be distributed in the same way. But you can avoid landlord tax by sharing out your rental income in varying ways.
How you can avoid landlord taxes
Here's a real-life example of how you can avoid landlord tax:
You own your investment property with your son who is at university. You own 80 per cent of the property and he owns 20 per cent. The annual rental income on the property is ВЈ6,000, which means that you get ВЈ4,800 and your son gets ВЈ1,200.
As you're a higher rate taxpayer, you pay 40 per cent on the rental income you receive, whereas your son doesn't pay any tax, as he is a student.
But the best way for you to avoid landlord tax and have more profit from your rental income is if you split the rental on your investment property with him receiving 80 per cent and you 20 per cent.
He would then receive a net income of ВЈ4,800, which would be under his personal tax limit of ВЈ6,475 (2009/10 figure). You would then only pay 40 per cent of ВЈ1,200, which would be ВЈ480,
giving you a tax saving of ВЈ1,440.
This example also works if you're an unmarried couple who own a property in the same way and only one of you is a higher tax payer.
Do note that you cannot use this method to avoid landlord tax if you're a married couple or in a registered civil partnership, as you would have to split the profits and losses 50:50.
Will HMRC let you avoid landlord tax?
To make sure that HM Revenue & Customs (HMRC) don't challenge this way of avoiding landlord tax, it would be wise for you as joint owners to both sign an agreement stating how the rental income will be shared for tax purposes. Try to do this at the beginning of the landlord tax year.
You can always quote HMRC's Property Income Manual (PIM 1030) to them if they question your practices to avoid landlord tax. It says that "joint owners can agree a different division of profits and losses and so occasionally the share of profits or losses will be different from the share in the property. The share for tax purposes must be the same as actually agreed".
If you're in any doubt on how to avoid landlord taxes, it may be wise to speak to an accountant Or you can get more tax-saving tips from the experts with our guide "How to Avoid Landlord Taxes ".
What about when I sell the investment property?
If you decided to sell your investment property, this way of avoiding landlord tax would have no affect on how much Capital Gains Tax (CGT) you each would pay. HMRC would charge Capital Gains Tax based on how you both actually own the property (you 80 and him 20).