Normally, when you own a property jointly, the profits subject to tax are split in proportion to your legal ownership. A jointly owned property is split 50/50. However, what if you want to change how the income is split for a jointly owned property? You can do this if you live with your spouse or a civil partner. You have the option to split the beneficial ownership from a legal one.
What is beneficial ownership?
The assessment of income tax is based on the concept of beneficial ownership rather than legal ownership. In most cases, this will be the same, but not always. This principle, articulated in the HM Revenue & Customs (HMRC) Trusts, Settlements and Estates Manual, aligns with the longstanding position upheld by the courts.
This basically means that the true or ‘beneficial’ owner is deemed to own an asset or income stream, regardless of the legal ownership vested in another party.
When it comes to property, the nature of ownership and the income split are common questions. So let’s delve deeper into how to change the split of property income owned jointly.
Co-ownership
If a property is owned by two or more individuals, carefully splitting the rental income and gains can reduce income tax and capital gains tax liabilities.
The method for achieving this depends on whether the property is co-owned by a married couple and those in a civil partnership or by non-married individuals.
Married couples & those in a civil partnership
If a married couple or civil partners jointly own a property, any rental income is automatically split 50:50 for income tax purposes, regardless of the actual ownership percentages.
For example, where the beneficial ownership is split, say 60:40, 70:30 or 80:20, the rental income is still split 50:50. So what’s the difference?
Legal and beneficial ownership are two different things.
- Legal ownership is effectively the paper title to the property and will be shown at the Land Registry.
- Beneficial ownership refers to the right of enjoyment of the property (i.e. the right to live in it or to let it out and receive rental income) and is relevant for tax purposes. The beneficial ownership split is often, but not always, also shown at the Land Registry.
If Mr. and Mrs. Smith purchase a property for rental purposes, both of their names will likely appear on the legal title, and they may each hold a beneficial interest in the property.
Given the scenario where Mr Smith is a higher or additional rate taxpayer while Mrs Smith is a basic or nil taxpayer, it may benefit Mrs Smith to receive all or the majority of any rental income. This strategy could help to reduce the overall income tax liability.
This means overriding the automatic 50:50 income split mentioned above. To do this requires both Mr and Mrs. Smith to complete a form for HMRC.
Form 17, as it was formerly known, allows a married couple to determine how the rental income is to be split. They can change the split for a jointly owned property.
You can find more information on this form and how to complete it here. For the application to be successful you will also need a declaration of deed. Your solicitor will be happy to help you with this.
Example – Legal vs. beneficial ownership
Mr and Mrs Smith purchase a property and agree that rental income should be split 5:95 in favour of Mrs Smith; this then requires that beneficial ownership must also be split 5:95.
On sale, without further changes, Mr Smith is subject to CGT on 5% of the gain, and Mrs Smith is subject to CGT on 95% of the gain. You can of course change the beneficial ownership by completing another Form 17 before the sale if that suits better.
What happens with Form 17?
You must complete Form 17 to change how income is split for a jointly owned property.
Form 17 must be completed and lodged with HMRC within 60 days of completion (of the form) to be valid. Both husband and wife must sign it; one signature is insufficient.
Evidence of the beneficial ownership split must now also be attached. Any subsequent change of circumstances after lodging Form 17 must be immediately notified to HMRC.
When is Form 17 not relevant?
A Form 17 is irrelevant where the legal ownership is in only one spouse’s name. In such cases, the automatic 50:50 split does not apply, nor can any beneficial ownership split.
Form 17 is also irrelevant where the property is co-owned by two or more non-married persons or those not in civil partnerships. Examples are siblings, parents and children, or cohabitees.
The lodgement of Form 17 implies that the owners are “tenants in common” and not “joint tenants”.
This means that if one spouse passes away, the other spouse does not automatically inherit the deceased spouse’s share of the property.
In this situation, both spouses must create a will, as one person’s share may not automatically pass to the other.
Dealing with taxes and optimising your tax position can be confusing. Changes in legislation can leave you overpaying your taxes without an expert by your side. Here’s how we can help you with your tax.