Article written by our Tax Partner at Beavis Morgan.
I am sometimes asked by one member of a married couple who are holding property together ‘can’t we just declare for tax our share of income however we like?’ Fortunately, in most cases this question arises after a period of our assisting them with their correct compliance. Sometimes, however, the question arises when we are asking the necessary questions when we engage a client. The below sets out the rules:
It is the default and legislative position that a husband and wife are taxed on property both for Income Tax and Capital Gains Tax in equal shares. This is the case regardless of the actual and recorded legal and beneficial ownership of the property. If a couple wish for Her Majesty’s Revenue and Customs (HMRC) to recognise a differing share of income and gains, then Form 17 needs to be prepared and submitted within sixty days of any change of ownership or sixty days from when they wish a new sharing ratio to be recognised. The primary condition for Form 17 to operate is that the contents of that form and the share of property ownership declared must be what subsists in law.
In order to change the ownership shares for this purpose, a declaration of trust stating the new beneficial ownership needs to be established, which will need to be drawn up by a solicitor. Something to consider is that this ownership share subsists for not just only income and gains arising, but is legal ownership in respect of receipt of sale proceeds, and total assets held at divorce or on death.
There is a quirk with Form 17 that its effect cannot be revoked unless the ownership of the property has been changed. If a couple own a property 80:20 and have filed Form 17 to reflect that but decide that in fact they would like to share equally, this becomes difficult. They may have to execute a declaration of trust to negligibly change the ownership shares to get to the position they desire.
A notable exception to the above is a married couple jointly owning a qualifying furnished holiday letting business. For most taxes, this is treated as a trading partnership, and in this case, trading and capital profits may be shared however required.
For advice and assistance in relation to this matter, please contact your usual Beavis Morgan Partner.