Working out rental income from property can be a tricky business. This is particularly true where you have a situation in which you may earn joint rental income but the property and mortgage might be in a partner’s sole name.
If you own a rental property, it is vital that you complete the tax return correctly, especially if you own the property jointly.
Completing a tax return
If you own a property which you let out, any profits made by this business are treated as part of your income.
If your profit from property letting (after taking off tax expenses and deductions) is over £2,500, you will need to complete a self assessment tax return. If your profit is under £2,500 and you are on Pay As You Earn (PAYE) your tax code can be altered to take the tax payable.
If you own a property jointly with your husband and wife, or civil partner, any profits and losses are treated as arising to you in equal shares unless:
- both entitlement to the income and the property are in unequal shares, and
- both spouses, or civil partners, ask their respective tax offices for their share of profits and losses to match the share each holds in the property
As this happens rarely, you will generally assume that any profits you make through renting the property will be split equally. When completing your tax return, you should therefore both complete a tax return providing details of your share of the income and expenditure relating to your property business.
However, where property is in the joint names of a husband and wife or civil partners of each other the determination of what is called your ‘beneficial interest’ under general law can be very complicated. Seek advice from a tax specialist or HMRC.
Rent a Room Scheme
The rules for paying income tax under the Rent a Room scheme are similar. If you own a property in your sole name and are letting a furnished room in your home, you can receive up to £4,250 in rent per annum without paying any income tax. You pay tax on any amount received above £4,250.
If you and your partner are both letting furnished accommodation in your joint home, you will each be entitled to receive half of the allowance (up to £2,125 for the 2010-11 tax year) without paying tax.