99:1 – Tenants In Common

Recent changes to stamp duty, tax regulation, and tenancy fees have made the property market an increasingly inhospitable place for landlords looking to turn a profit. As a result of these challenging conditions, many are now looking for new ways to structure their portfolios in order to maximise the returns they receive on their investments. One little-known yet highly effective method available to married landlords involves owning their properties as tenants in common rather than as joint tenants. Purchasing properties in this way – or else restructuring an already owned property’s ownership in this way – may be the difference between landlords scraping by or turning a healthy and consistent profit.     

Most married couples purchase their buy-to-let properties as joint tenants, meaning that they each own an equal share of the property and are therefore entitled to an equal share of the returns the property is able to generate. While this arrangement may make sense on a number of levels – modern-day marriages are considered to be equal partnerships, and this division of equity reflects this fact – it can often be highly inefficient insofar as after-tax profits are concerned.

Consider the following scenario:

A married couple has recently purchased a buy-to-let property worth £400,000. They own the property as joint tenants and have a mortgage of £250,000 with a fixed rate of 2.5% and a term of 25 years. They pay £500 in mortgage interest payments each month and receive £1,500 in rental income. Under new regulation surrounding mortgage interest tax relief – regulation which is in the process of being phased in and which will be in full effect by April 2020 – they will receive 50% of this rental income each and will then be expected to pay income tax separately, according to the tax band into which they each individually fall. They will then receive a tax credit worth 20% of their interest mortgage payments – so in this scenario, a tax relief worth £1,330 each – which they can subtract from the total amount of income tax they are due to pay. This is all good and well if they each fall within the same tax band, but if not – if one partner is in a higher income tax band than the other – then owning the property as joint tenants could cost them potentially thousands of pounds each year in income tax payments.

Say, for example, that one partner has no income and that the other is an additional rate taxpayer (45% income tax). If they own the property as joint tenants, they will pay a combined total of £3,450 in income tax each year, leaving them with an after-tax profit of £8,550. If, conversely, they own the property as tenants in common, with the basic rate taxpayer owning 99% of the property and the additional rate taxpayer owning the remaining 1%, they will pay a total of £69.00 in income tax on their property, leaving them with a combined after-tax profit of £11,931. The difference in combined after-tax profits between the two options is £3,381 in favour of the 99 to 1 tenants in common solution.

Joint Tenants:

Partner 1 Partner 2
% ownership 50% 50%
Tax band 20% 45%
Taxable Rental income* £0.00 £9,000.00
Income Tax without tax relief £0.00 £4,050.00
Mortgage Payments £3,000.00 £3,000.00
Tax relief £600.00 £600.00
Total income tax £0.00 £3,450.00
Combined after tax profit £8,550.00


*£12,500 of partner 1’s share of rental income isn’t taxable

Tenants in Common:


Partner 1 Partner 2
% ownership 99% 1%
Tax band 20% 45%
Taxable rental income* £5,320.00 £180.00
Income Tax without tax relief £1,064.00 £81.00
Mortgage Payments £5,940.00 £60.00
Tax relief £1,188.00 £12.00
Total income tax £0.00 £69.00
Combined after tax profit £11,931.00


*£12,500 of partner 1’s share of rental income isn’t taxable

The example presented above is extreme: one partner earns no income, while the other earns over £150,000, meaning that the difference in the amount of income tax they will each pay on their respective rental incomes is as large as it can possibly be. However, what should have been made clear by this example is that wherever one partner falls into one tax band and one partner falls into another, there are potential tax savings to be made by structuring the property’s ownership in the way outlined above. And this is not just true for those in the process of purchasing a BTL property, but also for those who already own a property as joint tenants: by restructuring their ownership as tenants in common with a 99 to 1 split in favour of the lower taxpaying partner, they could radically improve the profitability of their property.

Possible Capital Gains Tax (CGT) Implications

This is a tax efficient option for married couples because transfers between spouses do not create any immediate capital gains tax (CGT) implications, whereas if a property or share in a property was transferred between an unmarried couple, it would be deemed to take place at market value and a CGT charge may arise. When it comes time to sell the property, however, the new ownership split will affect the CGT position on sale. For example, if the ownership split is 99 to 1, the higher earning spouse will be taxed on 1% of the gain and the lower earning spouse on 99% of the gain. So, although this may be a beneficial split for income tax purposes, if the higher earning spouse has CGT reliefs available, such as capital losses or the annual exemption (currently £12,000) to reduce any gain, this should be considered in advance of a sale. 

It is important to note that even where a property is owned in unequal shares by a married couple, any income is still deemed to be split 50:50 unless a Form 17 is submitted to HMRC, along with proof of the ownership split, within 60 days of the purchase or transfer (e.g. a deed or declaration of trust). If a Form 17 is not submitted, any income from the property will need to be reported in equal shares.

Possible Stamp Duty Land Tax (SDLT) Implications

SDLT is potentially payable where a property or share in a property is transferred in return for consideration. Usually, this is based on the cash amount paid. However, if a property or share in a property is freely gifted between spouses but as part of the transfer one spouse agrees to take on part, or a greater part, of the mortgage this will comprise consideration for SDLT purposes.  If the value of the mortgage transferred is below the SDLT threshold then no SDLT should be payable, but it is still necessary to tell HMRC by filing an SDLT return. If the value of the mortgage transferred exceeds the SDLT threshold then SDLT will be payable (potentially with the 3% surcharge if the spouse taking on the mortgage already owns an interest in UK property) and an SDLT return must be submitted.

Why Not Purchase The Property Entirely In The Name Of The Lower Earning Partner?

The example above is all good and well, but it begs the question, why not just purchase the property solely in the name of the partner currently in the lower income tax band? Would this not be even more tax efficient? The answer to this question is, particularly for unmarried couples who may incur CGT charges if the ownership is changed after purchase (and with one or two qualifications), yes – however, there are a number of very good reasons not to structure the property’s ownership in this way. For one, mortgage rates tend to be lower for higher earners. By purchasing the property as tenants in common, both partners’ incomes are taken into account when applying for a mortgage. This means that they are likely to find themselves eligible for lower interest rates, which will allow them to minimise their monthly mortgage payments. This reduction in monthly mortgage payments will, in most cases, more than offset the insignificant tax benefits associated with a shift from a 99 to 1 ownership split to a 100 to 0 split.

In addition to lenders offering improved rates to borrowers with higher incomes, many lenders also have minimum income criteria. In the example presented above, we assumed that the second partner earned no non-rental income and was therefore able to benefit from a tax allowance and a lower rate of taxation. If, however, the ownership of this purchase was structured so that the lower earning partner owned the entirety of the property, they would find it far more difficult to obtain a mortgage, and the kinds of rates for which they would be eligible would be significantly higher. Looking at the situation holistically, then, the 99 to 1 tenants in common approach proves to be far and away the best option available to married landlords looking to maximise the profitability of the property. 

Knowing about this little-known way of structuring one’s BTL property purchase, therefore, may prove to be the difference between an investor choosing to place their money in the property market and them choosing to place it elsewhere.

For further information about the possible tax implications of the tenants in common ownership structure, you can get in touch with Stefanie Tremain, Director at Blick Rothenberg, on 020 7544 8824 or at stefanie.tremain@blickrothenberg.com. For further information about the mortgage implications of this structure, you can get in touch with Private Finance on 02073172820 or at info@privatefinance.co.uk.

Your home may be repossessed if you do not keep up with repayments on your mortgage.

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