Ignorance of the law is no excuse for married couple with jointly owned rental property

As most people might expect to be the case, taxpayers are ordinarily taxed on rental income from jointly owned properties in accordance with their share of beneficial ownership. However, where a rented property is jointly owned by spouses or civil partners, the default position is that each spouse/civil partner is taxed on 50% of the rental income. This is regardless of the actual split of beneficial ownership.

For spouses/civil partners to be taxed in accordance with their actual share of beneficial ownership, rather than the default 50:50 split, it is necessary to make an election to HMRC. To do this, the taxpayers must evidence their unequal split of beneficial ownership to HMRC alongside completing Form 17. Going forward, once a valid Form 17 declaration has been submitted, each spouse/civil partner will be taxed on the income based on their actual beneficial ownership. 

A recent case has highlighted the complexity of this area, as the First-tier Tribunal (FTT) dismissed a taxpayer’s appeal against HMRC penalties for failing to notify HMRC of his liability to tax on rental income from a property owned jointly with his wife. 

The jointly owned property had been let since 2007. Whilst the taxpayer was also in receipt of employment income, his wife did not have any other income. As she had no other source of income, the taxpayer and his wife had considered that the rental income belonged exclusively to her. On the basis that the rental profits did not exceed his wife’s personal allowance in any tax year, the taxpayer believed that there would be no tax on the rental income, so did not seek any tax advice. 

Once HMRC had discovered the omission of rental income, more than 15 years later, the taxpayer was charged to tax on his share of the rental profits. HMRC later issued penalties amounting to 20% of the underpaid tax, on the basis that the taxpayer had not deliberately omitted reporting the income. The penalties had been mitigated by HMRC to acknowledge the taxpayer’s co-operation in assessing the underpaid tax. 

The FTT described the taxpayer as a 'very honest and open witness who fully acknowledged that he did not appreciate all of the subtleties of the issues concerning property income that is split between joint owners'. 

Where not done so already, submitting Form 17 to HMRC may improve tax efficiencies between spouses and civil partners going forward. Those who believe they may have incorrectly declared rental income in the past should look to proactively address their affairs and seek appropriate tax advice. An unprompted disclosure to HMRC may give taxpayers a more favourable outcome.

If HMRC discovers a tax underpayment, even if it was not brought about deliberately, the minimum penalty could be 20% of the tax underpaid. As previously reported, HMRC has deployed significant resource to review landlords’ tax affairs in recent years, including checking information obtained from tenancy deposit schemes and online platforms like Airbnb. Taxpayers should therefore ensure that their property income tax affairs are up to date and correctly reported before HMRC identifies any discrepancies.