Jointly Held Property

An article by Mark McLaughlin

The tax legislation includes specific rules on income from assets held jointly by spouses (or civil partners) who live together. The rules provide a potential tax planning opportunity for spouses who are liable to income tax at different rates. The broad effect of the legislation (in ITA 2007, s 836) is that income from jointly held assets is taxable on both spouses in equal shares. This general rule is subject to certain exceptions. For example, an automatic 50:50 income split does not apply to partnership income (see below), or from distributions in respect of close company shares or securities. The ’50:50 rule’ can be useful. For example, if Mr A is a 50% taxpayer who owns a residential property for letting, he may wish to consider transferring (say) a 5% beneficial interest in the property to Mrs A, who is a basic rate taxpayer. The rental income would then be divided and taxed equally on Mr and Mrs A, even though the property is beneficially owned 95:5.

Joint declaration
A further exception to the automatic 50:50 income split can apply if the spouses beneficially own the asset (and they are beneficially entitled to the income) other than in equal shares. Both spouses may make a declaration to HMRC (on form 17) to be taxed in accordance with their unequal shares (ITA 2007, s 837). A declaration of trust generally records the beneficial entitlement of both spouses (nb by contrast, if property is owned as tenants-in-common, each owner will already hold a distinct share of the beneficial ownership). The declaration on form 17 must be submitted to the HMRC within 60 days, and takes effect in respect of income arising from the date of the declaration. The jointly held property rules were recently considered in Lorber (Decision No. 1) v Revenue and Customs [2011] UKFTT 101 (TC), in respect of bank and building society accounts held jointly between spouses. In that case, the tax returns of the husband (P) include no entries for interest credited to the accounts. P argued that none of the income should be taxed on him as the accounts and interest all belonged to his wife (S). He said that he managed his wife’s savings and has “appeared as a joint accounts holder”. P’s PAYE coding notices originally were originally compiled on the basis that he received 50% of the relevant interest. However, P rang HMRC and stated that the interest belonged to S, whereupon HMRC issued a revised coding that eliminated the interest. A subsequent HMRC enquiry revealed that all the income had been returned as S’s. P stated that the funds in joint names were S’s savings, and that he had gifted his savings to his wife. HMRC pointed out that P had unrestricted drawing rights on all the accounts and joint deposits. No declaration (on form 17 or otherwise) had been submitted to HMRC, and no agreement had been made with HMRC that the interest should be treated wholly as S’s income. The tribunal held that P had drawing rights on the entire income. In addition, the change in the notice of coding did not prove an agreement with HMRC to treat the joint accounts as S’s and not P’s. HMRC had no alternative than to amend the code, whether or not they agreed that the income was S’s and not P’s. The amendments to P’s self-assessments and additional assessments were upheld, and P’s appeal was dismissed. It is unfortunate that the taxpayer in the above case was unaware of a declaration under (what is now) ITA 2007, s 837. He said that had he known that a declaration would have cured the problem, he would have made one.
Non-spouse joint ownership
It should be noted that there are no provisions which automatically tax income from property in joint names on a 50:50 basis, in the same way as spouses (or civil partners). The legislation in ITA 2007, s 836 does not apply to unmarried couples (or couples not in a civil partnership). The beneficial ownership of property and entitlement to income are subject to the facts, and to any agreement between the parties. This means that property may be beneficially owned in different proportions to income entitlement. HMRC's Property Income Manual (at PIM1030) states: "Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed." Thus (say) an unmarried couple (A and B) who beneficially own a property in equal proportions could agree that A is beneficially entitled to 75% of the rental income, and B is entitled to 25%.

However, from a practical perspective it would be sensible to agree the division of rental profits in writing, before the start of the tax year in question. In addition, the correct shares of rental profits should be paid into separate bank accounts for each individual.

Partnerships

A partnership business also provides an opportunity for profits to be divided in different proportions to beneficial ownership. HMRC's guidance (at PIM1030) acknowledges that taxpayers may jointly own properties which are let out as part of a partnership business, but states that it will rarely be the case that individuals are in a partnership running an investment 'business' of letting property. HMRC considers that the existence of a partnership depends on the amount of business activity involved (e.g. the degree of commercial organisation, the extent of additional services provided, etc), but that merely holding property jointly does not constitute a partnership. In the case of partnerships involving spouses or civil partners, there is a statutory exception from the '50:50 rule' mentioned above (ITA 2007, s 836(3), Exception C) in respect of "income to which Part 9 of ITTOIA 2005 applies (partnerships)". In that case, the income is divided according to the terms of the partnership agreement. As in most other areas of tax, the importance of keeping proper documentation (e.g. a partnership agreement, notes of meetings to agree profit shares, etc) cannot be overstated, particularly in cases where the partners' rental business profit shares differ from their beneficial entitlement to the partnership's assets.

June 2011

Written by Ellie MacKenzie

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