Many married landlords are paying more tax than they need to, simply because they don’t understand how property ownership affects rental income.
Contrary to common belief, owning a rental property solely in one spouse’s name doesn’t mean they must declare all the rental income.
HMRC provides a tax-efficient workaround that could significantly lower your household tax bill. Here’s what you need to know.
(Read Time: Approx. 4 minutes)
Topics Discussed:
- How rental income can be split between spouses regardless of property ownership
- How to avoid unnecessary Stamp Duty charges when transferring property shares
How Rental Income Can Be Split Between Spouses
It is a widely misunderstood point among married landlords that you must own a property 50/50 to split the rental income equally for tax purposes.
This is not true. If you’re married or in a civil partnership and living together, rental income from jointly held property is automatically taxed on a 50/50 basis, regardless of actual ownership proportions.
What many don’t realise is that even if one spouse owns 99% of the property and the other owns 1%, HMRC will treat the income as equally split.
So why does this matter? Because in many relationships, one spouse is in a higher tax band than the other.
Shifting even part of the income to the lower-earning spouse can create substantial tax savings.
The Stamp Duty Trap When Transferring Property Shares
You might think the obvious solution is simply to transfer half of a property to your spouse to split the income.
While there are no Capital Gains Tax (CGT) implications when gifting assets between spouses, this move can still result in a significant Stamp Duty Land Tax (SDLT) bill, especially if the property has a mortgage.
This is because SDLT is triggered when the spouse taking ownership also assumes part of the outstanding mortgage.
HMRC treats this as “chargeable consideration”, and SDLT is payable on that amount.
For instance, if three properties each have £450,000 in mortgage debt, transferring half to a spouse would mean taking on £675,000 in debt, triggering SDLT even if no money changes hands.
According to HMRC guidance in the Stamp Duty Land Tax Manual, such mortgage transfers are counted as consideration and subject to SDLT.
A Simple Strategy That Avoids SDLT and Saves Tax
Luckily, there’s a practical and tax-efficient workaround.
You can transfer just 1% of the property to your spouse.
This fractional transfer is enough to trigger the 50/50 income split, meaning rental income can then be taxed equally between both spouses.
Why does this work? Because HMRC’s default treatment is 50/50 income split when spouses jointly own a property, regardless of ownership proportions, unless a Form 17 is submitted.
Transferring only 1% avoids significant SDLT because the value of the mortgage debt taken on by the spouse is minimal.
For example, on £60,000 rental profit, a 50/50 split shifts £30,000 away from the higher-earning spouse, potentially saving thousands annually if the receiving spouse is a basic or non-taxpayer.
Can You Go Beyond a 50/50 Split?
Yes, but with more complexity.
If you want to shift more than 50% of the rental income to the lower-earning spouse, you’ll need to:
- Transfer a larger share of the beneficial ownership.
- Contact HMRC.
- Support the change with formal documentation.
This route allows you to allocate up to 99% of the rental income to one spouse, which can be powerful if one partner has little or no other income.
However, care is needed. HMRC may challenge the arrangement if it’s not properly documented or executed.
Professional advice is strongly recommended here to ensure compliance and avoid scrutiny.
An Example Case
Consider the case of Doris and Mr Gupta.
Doris is a high-earning accountant making £600,000 a year, while Mr Gupta has no significant income.
Together they own three properties generating £135,000 in annual rental income.
Due to mortgage interest restrictions (capped at 20%) and Doris being taxed at 45%, the tax burden is unnecessarily high.
By transferring just 1% of the ownership to Mr Gupta, they can shift 50% of the rental income to him.
Because of his lower tax rate, this move alone can reduce their household tax liability by thousands.
More advanced structuring can enable a 90/10 income split without triggering unnecessary SDLT or CGT if done correctly and with professional support.
This would even further reduce the tax burden on the rental income, as Mr Gupta has little or no other income to add to the tax on the rental income.
Summary
Splitting rental income between spouses is one of the simplest ways to cut your tax bill, without needing to fully transfer property ownership.
Transferring just 1% to your spouse allows you to benefit from a 50/50 income split, and doing so can help reduce exposure to higher tax rates and avoid unnecessary Stamp Duty charges.
Thinking about going beyond 50/50? It’s entirely possible, but the paperwork must be watertight to prevent HMRC from challenging the setup.
For personalised advice on how to reduce your tax liability through smart property ownership, contact Tax Expert today.
Let us you in understanding HMRC rules with confidence and efficiency, and avoid any HMRC scrutiny down the line.
Fill out our form here for any questions, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel
