Declaring rental income on jointly owned properties

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:

• each spouse or civil partner is in fact entitled to a share other than 50/50 in the property and
• the share that a spouse or civil partner has in the income is the same as their share in the property.

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:

• no split other than 50/50 can be accepted until a satisfactory declaration is received
• a form 17 declaration must be made jointly. If one spouse or civil partner does not want to make a declaration both must accept the standard 50/50 split for jointly held property
• 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 will be taxed on their actual entitlement in any event, and so cannot make a form 17 declaration
• 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
• a couple do not have to opt for a different split. A couple could accept the standard 50/50 split for jointly held property, even if one spouse or civil partner holds 90% of the capital and income and the other spouse or civil partner holds 10%
• a couple might declare that their interest in property is split 60/40. Later their interests change so that they hold it 80/20. If they wish they may make a fresh declaration to reflect the new split. But it must reflect the actual position
• there is no limit on the number of declarations.

Legal advice

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.