Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
As a general rule, the fall-back position for couples who live together with their spouse or civil partners is that property income held in joint names is divided 50:50. This is regardless of the actual ownership structure.
However, where there is unequal ownership and the couple want the income taxed on that basis a notification must be sent to HMRC together with proof that the beneficial interests in the property are unequal. This is done using Income Tax Form 17, 'Declare beneficial interests in joint property and income'.
Where property is held in an unequal split, making a Form 17 declaration can be advantageous if for example, the person with the higher share of the property pays tax at a lower marginal rate than their partner.
The declaration is only valid if both partners agree. If one spouse / partner does not want to make a declaration both must accept the standard 50:50 split for jointly held property even if the ownership structure is different. There is no requirement to make a declaration as soon as a new asset is acquired.
The declaration does not give married couples and civil partners a general option to have income taxed in any way they like. A Form 17 declaration can be made only if the individuals are beneficially entitled to the property income in unequal shares. This could be anything other than 50:50. The share that a spouse or civil partner has in the income must be the same as their share in the property.
When a Form 17 cannot be used
There are a number of scenarios where a Form 17 cannot be used. This includes:
- income to which neither of you is beneficially entitled;
- partnership income;
- income from commercial letting of furnished holiday accommodation;
- income from shares in a close company;
- income which for tax purposes is treated as income of a third party, even if the income arises from property held in your joint names;
- property that is not held in unequal shares (you cannot choose to have the income taxed on an unequal basis because you think it would be to your advantage); or
- property held as beneficial joint tenants where you are both jointly entitled to the whole of the property and income. This is because you do not own the property in shares at all but are entitled jointly to the whole of both the property and the income.
Note that where a husband and wife or civil partners own property as beneficial tenants in common then they are each entitled to specific shares in the property and the income arising. In this case, a Form 17 declaration would be allowed.
How to make a Form 17 declaration
HMRC is clear that a declaration can be accepted only if made on Form 17. The form must be signed and dated by both spouses or both civil partners but can be sent to the tax office of either spouse or civil partner.
The declaration sets out the property and income they want the declaration to cover and states the interest each spouse or civil partner holds in:
- each item of property
- the income produced by each item.
The declaration only applies to the asset or assets shown on it. Other property, including any assets bought later, is not covered.
If the interest in property changes say from 60:40 to 80:20 a new declaration must be made to reflect the new split otherwise the standard 50:50 rule, then applies again unless the couple make a fresh declaration.
There is no limit on the number of declarations. Any number of declarations may be made to cover
- new joint holdings
- old joint holdings that have previously been dealt with on the standard 50/50 basis.
Validity of Form 17 application
The application is valid from the date the declaration was signed by the last spouse or civil partner. A declaration that is submitted to HMRC more than 60 days late is invalid and has no effect whatsoever.
For example, the husband signs on 10 June 2020, and the wife signs on 20 June 2020; the declaration applies to income that arises on and after 20 June 2020 provided the declaration reaches HMRC within 60 days of 20 June 2020.
When does the declaration remain in force till?
A Form 17 declaration stays in place until there is a change in the status of the couple. This means that the declaration will continue without any further action until one of the following events happens:
- One spouse or civil partner dies;
- The couple separate permanently;
- The couple divorce or the civil partnership is dissolved (where the couple have not already separated permanently); or
- The beneficial interest of either spouse or civil partner in either the property or the income it produces changes; for example, this can happen if one spouse or civil partner transfers any part of his/her beneficial interest to the other or to a third party.
The couple cannot simply choose to end the split of income which results from a declaration; it goes on running until one of the four events listed above occurs.
Even the smallest change of beneficial interest split (as mentioned in point 4. above) stops the declaration running. The standard 50:50 rule then applies again unless the couple makes a fresh declaration.
After death, permanent separation, divorce or dissolution the income is split in the normal way; that is, the person who is beneficially entitled to the income is taxable on it.
Form 17 for other related parties
Individuals other than spouses or civil partners cannot make a Form 17 declaration, for example, siblings. The 50:50 rule does not apply to them. Income is attributable to them on the basis of their entitlement. Couples that are in some other type of union (not as spouses or civil partners) cannot make a Form 17 declaration.
Form 17 after divorce or separation
Individuals who are married to, or are civil partners of, each other are treated as living together unless:
- they are separated under an order of a court of competent jurisdiction,
- they are separated by deed of separation, or
- they are in fact separated in circumstances in which the separation is likely to be permanent.
A married couple or civil partners who have separated would not be subject to the 50:50 rule, as it applies only to couples living together. They would be taxed on their actual entitlement to income.
Where a couple is no longer living together then the transfer of an asset between them is usually treated in the normal way as taking place at current market value. There is an exception for couples that remain together but are living separately for other reasons.
We would be happy to review any jointly owned property holdings to ascertain if any tax savings are possible.