A 50/50 split may not be tax efficient for your clients
What is the default position?
HMRC’s default position is that where someone lives with a spouse or civil partner – and has income from property which is jointly owned – normally they will be taxed on an even split of the income.
However, where the beneficial interests in the property are different it may be possible to apply for the income to be taxed in a different ratio. Clearly this will be tax efficient in certain circumstances such as one of the owners being a higher rate taxpayer.
For example, if the husband put in 60% of the capital to buy the property and the wife put in 40%, the couple could make an election for 60% of the interest to be assessed on the husband and 40% assessed on the wife. As the election must be aligned with the beneficial entitlement, it is not possible to choose a split purely based on the most tax efficient allocation (which may be 0% husband, 100% wife).
For 2017/18 tax returns a declaration now will be too late as it must be given to the inspector within 60 days of the date of the declaration. However, discussions with the client may mean that planning for 2018/19 needs to start now.
What is the catch?
The catch is that the beneficial interests need to be genuinely different to a straightforward even split. The reason behind the difference must also be evidenced. HMRC states:
Married couples and civil partners do not have a general option to have income taxed in any way they like. They can depart from the standard 50/50 split for tax purposes only where:
What evidence does HMRC accept regarding different beneficial interests?
Although HMRC does not specify an exact list, HMRC and most commentators refer to the evidence as normally being either a written declaration or a trust deed.
How is a declaration made by the taxpayer?
The declaration is normally made online.
Are there any other conditions?
There are a number of important issues to take into consideration before making a declaration. HMRC provides detailed guidance on the whole subject but some of the main points are:
Advice should be taken on the non-tax implications of changing the beneficial ownership. For instance, the changes may have an unintended effect on the split of sale proceeds of the property.