Can I Use My Spouse’s Allowance to Cut Property Tax?

Introduction

Owning property as a couple offers several tax advantages, particularly when it comes to Income Tax and Capital Gains Tax. Many couples wonder whether they can use their spouse’s or civil partner’s allowances to reduce the amount of tax they pay on rental income, property sales, or other property-related income.

The good news is that, in many cases, you can share ownership or transfer assets to your spouse to make full use of both partners’ tax-free allowances and lower tax rates. This can result in significant savings, provided the transfers are genuine and correctly structured.

This article explains how spouses and civil partners can use each other’s allowances to reduce property tax, the rules you must follow, and what to consider before making any transfers.

Understanding Property Tax for Couples

When you own a property that generates income or gains, you may have to pay:

• Income Tax on rental profits from buy-to-let or furnished holiday lets.

• Capital Gains Tax (CGT) on profits when you sell or transfer property.

• Inheritance Tax (IHT) on the value of property passed on after death.

Each partner has their own personal allowances and tax bands, which means couples can often reduce their overall liability by distributing property ownership and income strategically.

Sharing Rental Income Between Spouses

If you and your spouse jointly own a property, the rental income is usually split 50/50 by default. Each of you declares your share on your Self Assessment tax return and pays tax according to your personal tax rate.

This arrangement works well when both partners pay similar rates of tax. However, if one partner earns significantly less, you could reduce your total Income Tax bill by changing the ownership structure so that more of the rental income goes to the lower earner.

Example

James and Sarah jointly own a rental property that generates £20,000 in profit each year. James is a higher-rate taxpayer (40%), while Sarah pays tax at 20%.

If the income is split equally, they each receive £10,000. The total tax due would be £6,000 (£4,000 from James and £2,000 from Sarah).

If they transfer ownership so that Sarah owns 80% of the property, she would receive £16,000 of the income, and James would receive £4,000. The total tax bill would fall to £4,800, saving the couple £1,200 per year.

How to Change the Income Split

To change how rental income is divided, you must:

1. Legally transfer ownership using a deed of trust or transfer of equity.

2. Notify HMRC by submitting Form 17 within 60 days of the transfer.

You must provide evidence of the actual ownership proportions. HMRC will not accept Form 17 if the split is not legally recognised.

Transferring Property Between Spouses

You can also transfer full ownership of a property (or a share of it) to your spouse or civil partner without triggering Capital Gains Tax or Stamp Duty Land Tax in most cases.

This rule only applies if you are legally married or in a registered civil partnership. Transfers between unmarried partners may trigger CGT and Stamp Duty charges.

By transferring a property to a lower-earning spouse, you can:

• Reduce the rate of Income Tax on rental profits.

• Lower Capital Gains Tax when selling the property in the future.

• Use both partners’ annual CGT exemptions, which are £3,000 each (2024 25 tax year).

Example

Emma owns a second property that she rents out, earning £12,000 in profit annually. She pays 40% tax, resulting in a £4,800 tax bill.

If she transfers the property to her husband, Tom, who has no other income, he can use his personal allowance (£12,570) to cover the rental income. The tax owed drops to £0, saving the couple £4,800 per year.

Using Both Partners’ Capital Gains Tax Allowances

When selling a second home or investment property, you can reduce Capital Gains Tax by using both partners’ annual allowances.

Each person has a £3,000 CGT exemption per tax year. If you jointly own a property, you can double this exemption to £6,000, meaning the first £6,000 of profit is tax free.

You can also use both partners’ tax bands to reduce the overall CGT rate. Gains falling within the basic-rate band are taxed at 18% for residential property, while gains in the higher-rate band are taxed at 24%.

By transferring part of the property to your lower-earning spouse before selling, you can ensure more of the gain is taxed at the lower rate.

Example

A couple sells a buy-to-let property, making a £60,000 gain. If only one spouse owns it and is a higher-rate taxpayer, the full gain is taxed at 24%, resulting in £14,400 in tax.

If ownership is split 50/50 and the other spouse is a basic-rate taxpayer, the couple can use two CGT allowances (£6,000 total) and pay less tax overall. Their combined CGT liability could fall by several thousand pounds.

Inheritance Tax Benefits for Spouses

Transfers of property between spouses are exempt from Inheritance Tax, regardless of value, provided both partners are UK-domiciled.

In addition, when the first spouse dies, any unused portion of their nil-rate band (£325,000) and residence nil-rate band (£175,000) can be transferred to the surviving partner. This can allow a married couple to pass on up to £1 million tax free to their children or other beneficiaries.

Unmarried partners do not benefit from these exemptions, so marriage or civil partnership can have significant tax advantages when it comes to property inheritance.

Important Considerations Before Transferring Property

Although transferring property between spouses can reduce tax, it is important to consider:

• Mortgage agreements: Some lenders require approval before adding or removing a name.

• Legal and conveyancing fees: Professional costs may apply when changing ownership.

• Loss of control: Transferring ownership means the other person legally owns that share of the property.

• Future relationship changes: If you separate or divorce, ownership transfers can complicate financial settlements.

Always seek advice from a solicitor or accountant before transferring property to ensure it is done correctly and tax-efficiently.

The Role of an Accountant

An accountant can help you:

• Calculate potential tax savings before transferring property.

• Complete the correct HMRC forms and ensure compliance.

• Structure ownership to make full use of allowances.

• Advise on Capital Gains Tax planning before selling property.

Professional advice is especially important for couples with multiple properties, joint investments, or differing income levels.

Conclusion

You can use your spouse’s allowances to reduce property tax in several ways, including transferring ownership of rental properties or sharing capital gains when selling. By structuring property ownership carefully, couples can make full use of both partners’ tax-free allowances and lower-rate tax bands.

However, the rules are strict, and transfers must be legally documented. With the right advice and planning, using your spouse’s allowances can lead to substantial long-term tax savings while remaining compliant with HMRC regulations.