Dividing up the property spoils

Leading question

We recently heard from one of our subscribers, an accountant who had been asked a bit of a poser by one of his clients. It’s a question we’ve heard a thousand times before and it goes something like this. “My wife and I own a property 50/50 which we rent out. But we want to declare all the income on her tax return as she only pays tax at 20% compared to the 50% that I pay. Is there a way to do this?”

Taxman’s conundrum

Quite reasonably, the Taxman expects everyone to pay tax on their income and not pass it over to someone else to pay because it will save money. As a rather droll tax inspector once commented, “we operate a Pay As You Earn system, not Pay As You Like!”. And when it comes to income from investments, whether that’s shares or a rental property, he expects you to declare and pay tax on the income in proportion to your ownership of the asset. He’s very insistent on this point, but we’re equally insistent there’s a legitimate way around it.

Change of ownership

The simple solution for our subscriber’s client was for him to transfer his share of the property to his wife. This means that as she would then own all of the property she would pay the tax on all the income. This idea works but it’s a bit cumbersome if you want to switch the income back later or just vary how much you each get from year to year. And there’s the matter of not wanting to transfer all your assets into your spouse’s name. What’s needed is a scheme that allows you to allocate the income how you want but keep the 50/50 ownership.

Tax fiction

There’s no more satisfying way to get around one of the Taxman’s rules than to find another that overrides it. So why not transfer the property to a Limited Liability Partnership (LLP)? Strictly, these are closer to a company than a partnership in the way they are treated under general law. But the Taxman likes to be different, so he ignores general law and treats an LLP like a general partnership. His Business Income Manual says so (see BIM72115). But where does this get you?

Any which way

Partnerships can share profits between the partners any way they want and entirely without regard to who owns the partnership assets. So our subscriber’s client could vary the income between him and his wife each and every year but keep the 50/50 ownership. That’s not just our view; the Taxman agrees even though he doesn’t like it! Take a look at his manual BIM72065. It’s now over to our subscriber to put this tax-saving plan into action.

Trap. LLPs have to submit accounts and an annual return to Companies House each year. The accounts must be in an approved format and so you may need an accountant to prepare these. If you keep good records this should cost no more than several hundred pounds, but you need to factor this in against any potential tax savings.

Tip. The property LLP tax-saving arrangement can work for others apart from husbands and wives and you can have more or less any number of partners. But speak to your accountant before pressing ahead to help you set up the LLP to get the best tax advantage and avoid any traps.