In England & Wales, the joint ownership of property can be two forms:
In joint tenancy, each owner has equal rights to the whole of the property. If one of the owners dies, part owned by deceased owner automatically passes to the surviving owner.
For tax purpose, each owner is treated as having an equal share of the property and income.
A house is worth £100,000, and annual rental income is £5,000 owned under joint tenancy. The income of £2,500 is taxed on each owner and capital gains on half of the property is taxed on each owner when the property is sold.
This is the case for both spouses and other joint owners.
Tenancy in Common
In a tenancy in common, each joint owner owns a fixed share of property as determined.
You can own 40%, and your spouse can own 60%. For tax purposes, each owner is treated as having the % as determined in tenancy in common, except for spouses.
For married couples and civil partners who are living together, the default treatment is 50% each even if the actual split is different.
Can I Change Default 50:50 Split?
We have seen that for married couples and civil partners, the default split of jointly held property income and ownership is 50:50. This can be changed by election. To make an election to change, you need to fill Form 17 and submit to HMRC. You can download Form 17 from here.
As per HMRC, you can use Form 17 to declare beneficial ownership if you meet all the conditions below:
- You are spouse or civil partner and own joint property in unequal shares
- You are entitled to the income arising in the proportion of those shares and want to be taxed on that basis.
But, bear in mind that this election cannot be made retrospectively. You can go a maximum of 60 days before the filing of the form assuming you have signed the forms at that time.
As per HMRC, you cannot declare unequal shares just for tax advantage. The declaration in Form 17 should reflect the actual beneficial ownership. Actually, HMRC wants to see proof of beneficial ownership which is usually in the form of a deed of trust.
You declared income split 10:90 between you and your wife in Form 17, but, in reality, you are the 100% beneficial owner. In that case, the election will be invalid.
Can I Change Election Form 17 as Many Times as I Like?
If there is a change in beneficial ownership, then you can change the % split as many times as you like using Form 17. There is no limit. But, each time you change the income split, this needs to be supported by a change in beneficial ownership.
What About Joint Owners Other than Married Couples (e.g. Unmarried Couples)?
For unmarried couples or any two independent parties, the income is not automatically split as 50:50 as in case of married couples and civil partners.
So, the joint owners other than spouses & civil partners can choose to share the income in whatever manner they decide. However, this proportion for tax purposes should follow the way the income is actually shared.
Rachael and Michael jointly own the property and shares the rental income in the proportion of 90:10. In this case, the tax treatment will follow actual treatment although the beneficial ownership may be 50:50.
So, Form 17 is irrelevant for other joint owners. However, I advise having some sort of agreement to show the split of rental income. Also, it is advisable to split the bank receipt for rental income in the proportion agreed to show it has been actually shared.
But, don’t confuse this income split with a share in beneficial ownership. Beneficial ownership is the proportion owned by you in the jointly held property. This should be decided when you buy the property. If you want to change this at a later date, there will be capital gains tax implication as the change will be treated as a part disposal for capital gains tax purpose.
Transfer of Beneficial Ownership Before Sale to Save Capital Gains Tax
We noted that the beneficial ownership of the property can be transferred as many times as you like. So, one tax planning strategy is to transfer the share of the property to the spouse before the sale to lower overall tax liability. This is fine only if properly done.
One of the important things to consider is whether the transferee is beneficially entitled to the money received from the sale. If he/she is not beneficially entitled, the transfer before sale may be invalid.
Another point to note is that the transfer of the property should be done before agreeing to the sale of the property. It is safe to make the transfer before the property is put on the market for sale.
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