Where property is owned jointly it is possible to divert income from a high rate taxpayer to a low rate taxpayer without necessarily giving up the beneficial interest in the underlying property.

Between husband and wife and civil partners a simple transfer of legal title into joint names, with no change in the beneficial interest will mean that the rental income is automatically split 50:50 for tax purposes between the spouses (s.836 ITA 2007). If a different split of income is required then the beneficial interest must be held in the same proportion as the desired split of income and a joint declaration under s.837 sent to HMRC.

For non-spouses the situation is different. Where there is any beneficial joint ownership (for example 99:1) this gives an opportunity for the rental income to be split in whatever proportion the owners agree between themselves. So if a taxpaying grandparent for example owns a rental property and wishes to pass income to grandchild in a tax effective way without transferring assets they could give a 1% beneficial interest (covered by annual CGT exemption) and agree to split the income however they wish, even as much as 99% to the grandchild. This could form the basis of some useful late planning for school fees for example.

General considerations:

You will be paying tax at the 40% income tax rate if your income less tax allowances exceeds £35,000 and at the additional rate, 50%, if your taxable income exceeds £150,000.

Tax (Photo credit: 401K)

Additionally, your Personal Allowance reduces when your income is above £100,000 – by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age. As the basic personal allowance is £7,475 for 2011-12, when your income exceeds £114,950 this tax allowance is eliminated.

Income under £100,000

If your income is under £100,000 you should not lose any of your personal tax allowance and none of your top-sliced income will be taxed at 50%.

Income between £100,000 and £114,950

In this income range you are progressively losing a tax allowance and paying tax at 40% on the top sliced £14,950. The combined tax suffered is therefore a significant 60%.

Income over £150,000

Will all be taxed at 50%

Ironically, therefore, if you want to adopt strategies to reduce your taxable income, it is not those with income over £150,000 that stand to save tax at the highest rate. Instead it is those with income between £100,000 and £114,950 where the possible tax savings are at a rate of 60%.