Today’s blog explores Form 17 declarations and the tax treatment of jointly held property of married couples and civil partnerships. There are potential tax planning opportunities where one spouse or civil partner pays tax at the higher rate, and the other does not, and therefore it can be of benefit to have the allocation of rental profits altered to attribute a greater amount of profit to the lower rate taxpayer.
There are two different types of joint ownership of property:
• Tenancy in common – where each individual owns a specific share in the property; and
• Joint tenancy – where the owners together hold an undivided interest in the whole property
Where property is held jointly by married couples or civil partners, there is a presumption of ownership via joint tenancy for tax purposes, therefore the standard treatment is for both capital and income to be taxed on a 50:50 entitlement basis.
The standard 50:50 split for jointly held property is applied automatically by HMRC even if, for example, one spouse or civil partner holds a 90% entitlement to the capital and income and the other spouse or civil partner holds only 10%. This may not be beneficial for tax purposes, therefore married couples and civil partners may make a request to HMRC to be taxed on their actual entitlement to capital and income from the jointly held property. This is done by submitting a joint declaration of unequal beneficial interests to HMRC.
A declaration cannot be made where spouses or civil partners own property as beneficial joint tenants. In these circumstances they do not own the property in shares at all, but are jointly entitled to the whole of the property and any income or capital gain arising from it.
Where a declaration may be made, it must be made jointly. If one spouse or civil partner does not wish to make a declaration, both must accept the standard 50/50 split for jointly held property.
This only applies for married couples or civil partners who are living together. For those separated or other individuals in joint ownership, the 50:50 rule does not apply, therefore a declaration is not required.
How do you make the declaration?
The declaration must be made using Form 17, which is available on HMRC’s website.
To be accepted by HMRC as a valid declaration, the completed form must include:
• details of the property and income the declaration is to cover
• the actual interest each spouse or civil partner holds in each item of property
• the income produced by each item of property
The form must be signed and dated by both spouses or civil partners, but it need only be submitted to the tax office of one spouse or civil partner. Separate declarations may be made for individual properties at different times as required.
Once made, the declaration remains in force until one of the following occurs:
• the couple’s interests in the property or income change
• the couple stop living together as a married couple or civil partners
No split of capital and income other than 50:50 will be accepted by HMRC until a satisfactory declaration has been submitted and accepted.
When making a form 17 declaration, sufficient evidence must be provided to prove the stated beneficial interest in the property of each individual. The accompanying evidence expected by HMRC should take one of the following forms:
• A declaration of trust of unequal shares, that is a legally binding document stating that the property is held, for example, 25% for A and 75% for B
• A restriction in Land Registry Form A, which will generally mean that there is a tenancy in common rather than joint tenancy
• Notice of severance of the joint tenancy by one of the joint owners
• An act of severance, for example, the bankruptcy of one of the owners, or one owner taking out a loan secured on the property
• Evidence of a resulting or constructive trust
In reality, the most common form of evidence will be a properly drawn up declaration of trust between the joint owners.
The completed and signed declaration should reach HMRC within 60 days of the date of signature. Provided it is accepted, the split of income and capital will be treated in accordance with the declaration as from the date of signature. Should the couple sign on different days, it is the later date that applies.
It is important to note that only income arising after the date of signature is covered by the declaration. Income arising prior to that date will be treated for tax purposes in accordance with the standard 50:50 rule, or a previous valid declaration. Where a new declaration is made part way through a tax year, the income arising will need to be apportioned differently for the period pre declaration and post declaration when preparing self assessment returns.
Form 17 declarations may not be backdated beyond the applicable 60 day period for submission. Any declaration received by HMRC dated outside of that period will not be accepted and the declaration will be invalid. In that case, a fresh declaration will need to be made and until that is received and accepted by HMRC, income will continue to be treated in accordance with a previous valid declaration or the 50:50 rule.
Tax Planning Considerations
Where one spouse or civil partner is a higher rate taxpayer and the other is not, it may be of benefit to have rental income treated as being mainly belonging to the lower rate taxpayer.
Where the property is held as joint tenants, it would be necessary to sever the joint tenancy and put a declaration of trust in place to evidence the unequal interests in the property going forward. This will also affect the capital entitlement to the property, thus potentially the overall capital gains tax liability arising on any future disposal. Care is needed where the property is subject to a mortgage as this may give rise to other unwanted tax implications.
Professional tax advice should always be sought prior to any action in respect of changing entitlement to jointly held property.
As specialist landlord tax advisors, RITA4Rent would delighted to assist you, and should you have any questions regarding this, please do not hesitate to contact us.