Joint Rental Income

For income tax purposes, a married couple who are living together and own a rental property in joint names are generally treated as entitled to half of the income each. This deeming rule is found in the legislation at ITA 2007 s836, which states –

(1) This section applies if income arises from property held in the names of individuals–

(a) who are married to, or are civil partners of, each other, and

(b) who live together.

(2) The individuals are treated for income tax purposes as beneficially entitled to the income in equal shares.

There are some exceptions, but these are not relevant in the circumstances described above.   Also note that the legislation applies to civil partners as well as husband and wife marriages.

Based on the above legislation, HMRC assumes that husband and wife own a property in equal 50% shares; however, it is possible to change the 50:50 position by way of a declaration of trust over the property to change the beneficial ownership so that one spouse will be entitled to a greater share of the income.

Once a declaration of trust is in place and the beneficial ownership has changed as a result of that trust, husband and wife will then be taxed on their share as determined by the declaration, but only if that necessary information is submitted to HMRC by way of Form 17 so that the legislation above is overridden.

Form 17 can be found here: https://www.gov.uk/government/publications/income-tax-declaration-of-beneficial-interests-in-joint-property-and-income-17.

The declaration only takes effect for income arising on or after the date of the declaration, provided that Form 17 is forwarded to HMRC within 60 days of the declaration date. Evidence of the beneficial interest must also be provided at the same time, so a copy of the declaration should be submitted with Form 17. Any valid declaration then remains in place until the interest in either the income or capital ceases to be in line with the declaration.

It is important to remember that you cannot simply elect under s837, using form 17, without having firstly entered into the declaration of trust.

For capital gains tax purposes, the transfer of a beneficial interest between husband and wife would, under TCGA1992 s58, be a no gain/no loss transfer, so no capital gains tax would be payable when the declaration of trust is in place. It is worth noting, though, that because capital gains tax follows the beneficial ownership, any proceeds from a future disposal would be split in the ratio of the beneficial ownership in place at the time of sale.

Settlements legislation

Transferring income-producing assets between spouses is a popular tax planning approach and is often done where one spouse pays income tax at a lower marginal rate than the other. HMRC will scrutinise arrangements where income is transferred to one spouse, but the underlying capital is not. Such transfers may constitute a settlement. The settlement rules are complex, but they can result in income being taxed on the donor spouse despite the transfer.

A settlement is defined within ITTOIA 2005 s620(1) as any “disposition, trust, covenant, agreement, arrangement or transfer of assets”. Therefore, a simple transfer of assets between persons could be regarded as an ‘arrangement’, falling foul of the settlement’s legislation, especially if either the ‘settlor’ of this arrangement or their spouse can benefit from the property transferred, often referred to as a ‘bounteous arrangement’.

The rules mean that if a settlor or their spouse can benefit from a settlement, any income arising in the settlement will be taxed on the settlor even if they did not receive it.

There are a number of explicit exceptions included in the legislation. The most important of these is the exception for outright gifts between spouses.

Income arising on an outright gift of assets between spouses is not taxed on the settlor, provided all of the following apply:

• The gift is unconditional.
• The gift carries a right to the whole of the income, and
• The gifted property is not wholly or substantially a right to income.

As one spouse, in the question above, is gifting a share in a rental property to the other spouse so that rental profits are taxed in that other spouse’s name; it will only be effective if the gift is outright and unconditional, that is, the recipient is free to use the income and dispose of the property as they see fit. Therefore, if the husband retains capital ownership, the settlements legislation will likely determine that for income tax purposes all of the income is taxed on the husband.

For completeness, Stamp Duty Land Tax (SDLT) is also in point. There is no spouse exemption for SDLT (or LBTT or LTT, depending on where the rental property is). If there is no direct payment made for a change in the beneficial ownership, changes in existing mortgage debts are deemed consideration for SDLT. As the property is already in joint names, it is assumed that any mortgage will already be in joint names. However, these rules need to be carefully checked to ensure there are no unexpected consequences, and it is recommended that the mortgage agreement be reviewed and the lender notified as appropriate.

In addition, as with all transfers of property, legal advice should be sought. It may be necessary to change the property ownership from joint tenants to tenants in common to facilitate a change in beneficial ownership.

Senior Tax Manager
Angela Robson

For more information, please contact us at: consultancy@vantagefeeprotect.com