Many property investors in the UK choose to hold their buy-to-let properties jointly with their spouse. However, if one spouse falls into a lower income tax bracket than the other, there’s a significant opportunity to reduce tax liabilities by transferring a greater share of rental income to the lower-taxpayer spouse. This guide will walk you through the process of restructuring your ownership, shifting from joint tenants to tenants in common, executing a Declaration of Trust, and submitting Form 17 to HMRC to make the most of this strategy.

Tax Benefits of Transferring Ownership to the Lower-Taxpayer Spouse

Lower Income Tax Rate: If the lower-taxpayer spouse is in the basic rate (20%) tax band and the other spouse is in a higher (40% or 45%) tax band, rental income will be taxed at the lower rate.
Increased Take-Home Income: This shift ensures more of your rental income remains available rather than being taxed at the higher rates.
Efficient Tax Planning: This strategy lets you structure your rental income tax-efficiently, maximising your financial gains.
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Steps for Changing Ownership and Reporting to HMRC

Step 1: Convert Joint Tenancy to Tenancy in Common

If your property is currently held as joint tenants, the first step is to change the ownership structure to tenants in common. This allows you to define each spouse’s share in the property.

Step 2: Execute a Declaration of Trust

Once the ownership structure has been changed, create a legal document (the Declaration of Trust) that outlines each spouse’s share of the property. This can specify a different split, such as 99/1, rather than the automatic 50/50 split that comes with joint tenancy.

Step 3: Complete Form 17

Form 17 is used to inform HMRC about the new ownership split and how rental income should be allocated between spouses.

Step 4: Submit Form 17 and Declaration of Trust to HMRC

The completed Form 17 and the signed Declaration of Trust must be submitted to HMRC within 60 days of execution. Failure to do so will result in HMRC not accepting the change.

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Understanding Joint Tenancy vs. Tenancy in Common

Most couples who purchase a buy-to-let property together do so as joint tenants, meaning they share equal ownership of the property (50/50). Should one spouse pass away, the property automatically transfers to the surviving spouse. However, if you wish to allocate ownership differently (e.g., a 99/1 split), the ownership structure needs to change to tenants in common. This arrangement allows each spouse to own a distinct percentage of the property.
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How to Convert Joint Tenancy to Tenancy in Common

1. Serve a Notice of Severance:
Notify your spouse of your intent to sever the joint tenancy and change to tenants in common. You can use Form SEV (available on the HM Land Registry website) to do this.

2. Register the Change with HM Land Registry:
Submit the completed Form SEV to HM Land Registry, along with necessary documents, such as the property title deed and identification documents. You may also need to submit any supporting legal agreements.
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Executing a Declaration of Trust

Once the ownership structure has changed to tenants in common, it’s essential to create a Declaration of Trust. This legal document formally states how much of the property each spouse owns. For instance, you may decide that the lower-taxpayer spouse owns 99% of the property while the higher-taxpayer spouse retains 1%.
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Filing Form 17 with HMRC

Who Can Use Form 17?

- Married couples and civil partners who jointly own a property as tenants in common and want the rental income to be taxed based on their actual ownership shares.
- Couples with a valid Declaration of Trust specifying the ownership proportions.
- Couples wishing to allocate more rental income to the spouse in the lower tax bracket to reduce overall tax liability.

- Couples submitting the form within 60 days of signing the Declaration of Trust.

Who Cannot Use Form 17?

- Non-spouses or couples who are not in a civil partnership cannot use Form 17.
- Properties not jointly owned by spouses or civil partners, or those held as joint tenants, cannot use Form 17 unless ownership is first changed to tenants in common.
- If a valid Declaration of Trust doesn’t exist, HMRC will not accept Form 17.
- Properties held within a limited company structure do not qualify for Form 17.

Key Considerations

Stamp Duty Land Tax (SDLT): If there is an outstanding mortgage and the ownership change can results in SDLT, be mindful of the tax implications.
Capital Gains Tax (CGT): Transfers between spouses are exempt from CGT, making this strategy tax-efficient.
Legal Ownership: During this process, one spouse legally transfers their share of the property to the other.
HMRC Deadline: Form 17 must be submitted within 60 days of signing the Declaration of Trust, or HMRC will not accept it.
No Retrospective Changes: Form 17 cannot be used to change the income allocation retroactively. The new split only applies from the date of submission and acceptance by HMRC.
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Conclusion

If you and your spouse jointly hold a buy-to-let property and one of you is in a lower tax bracket, restructuring the ownership can lead to substantial tax savings. By converting from joint tenants to tenants in common, executing a Declaration of Trust, and submitting Form 17 to HMRC, you can ensure your rental income is taxed in the most efficient manner possible.
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Ready to optimise your property tax strategy?
Consult with us today to see if transferring ownership to a lower-taxpayer spouse could benefit you. Taking the right steps can ensure you are maximising your financial returns from your buy-to-let property.