You may be familiar with the term ‘tenants in common’, but how does it help some landlords run a more tax-efficient buy to let property investment business? Jeni Browne explains.
As landlords look for more ways to make their property investment businesses as tax-efficient as possible, it’s sometimes the seemingly simple things that can make a significant difference.
While many people believe that investing via a limited company is the only way to structure your investment more tax-efficiently, this is not the case. Tenants in Common is a way of arranging personal ownership of buy to let property that can be incredibly beneficial to investors. However, you must speak to a professional tax adviser before making any decisions.
What is Tenants in Common?
When you purchase a buy to let property with someone else (not through a limited company), you have two options when it comes to structuring the ownership:
Joint tenants: you both own 100% of the property and are responsible for 100% of the mortgage.
Tenants in common: the ownership of the property is defined as a percentage (e.g. 70/30) between the two of you, but the mortgage is still 100% of both parties responsibility.
A tenants in common structure is common when borrowers want their portion of the property to go to someone other than the other owner in the event of their death. For example, two business partners purchase a buy to let. If either should die, they may want their 50% share to go to their spouse rather than the business partner.
Benefits of Tenants in Common for Buy to Let Investment
The primary benefit of owning a buy to let property as tenants in common relates to tax. Suppose the two people on the property deeds are in different tax brackets (for example, higher and basic). In that case, it can be more tax-efficient to give the basic rate taxpayer the majority share of ownership. This means that the majority of the rent will be included in their lower-rate tax allowance. Here’s an illustration:
A married couple, Person A and Person B, want to purchase a buy to let property that will bring them £1,000 per month in rental income.
Person A earns £100,000 per year. They are, therefore, a higher-rate taxpayer.
Person B works part-time and earns £12,000 per year. Currently, this income is included in their personal allowance, but rental income is going to push them into the basic rate tax band at 20%.
If they were joint tenants, each would take £500 in rental income per month and be taxed accordingly. Of course, this means that all of Person A’s share is taxed at 40%, most of Person B’s at 20%.
As tenants in common, the couple can split the property ownership 99%/1% in favour of Person B. 99% of the income is taxed at the basic rate of 20%, and 1% is taxed at 40%. Ultimately, the couple gets to take home a higher percentage of the income than if they were joint tenants.
The obvious win here is that the couple doesn’t pay as much tax on the rental income. Additionally, using this arrangement can also allow you to borrow more from a mortgage lender. By applying as tenants in common, the lender can see you’ll have a greater profit, which can get you a better stress rate rental calculation.
As you’re investing personally, rather than via a limited company, you will be able to access slightly lower buy to let mortgage rates, too (although the gap here isn’t as big as it used to be). As you’re both still 100% responsible for the mortgage debt, there’s no additional risk from the lenders perspective.
You must seek professional tax advice before making any decisions, as everyone’s circumstances are unique.
How to apply as Tenants in Common
Purchasing a property as tenants in common is a process your solicitor deals with, and you will need additional documents such as a Declaration of Trust and Will, too. The good news is, it’s very straightforward to do and doesn’t make the mortgage application or underwriting process any more complicated. There is likely to be an additional fee for the Trust documents and Will if you’re setting these created from scratch or amending them.
What you will need to do on the day of purchase is complete Form 17 online. It’s important to note that this cannot be backdated, and the tax benefits only start when the form is submitted. This is another reason you must seek professional tax advice first to run through all the necessary documents that need completing and when.
While we can’t help with the tax decisions, we can create and talk you through different mortgage scenarios to compare costs. So, if you have any questions or are ready to purchase your first or 100th buy to let property, give our expert team a call today on 0345 345 6788, or email firstname.lastname@example.org to get started!