• IanCooper FCA

Jointly Held Property – Splitting Income Using Form 17

Land ownership Two or more persons may hold legal title to land (which includes buildings attached to it; referred to for convenience as real estate) only as joint tenants; however, beneficial ownership of real estate may be held either as joint tenants or tenants in common. For tax purposes it is beneficial ownership that is important.

Legal title/ownership is effectively the paper title to real estate; beneficial ownership refers to the right of enjoyment of the real estate (i.e. the right to live in it, let it out or receive rental income from it). Legal title to any piece of real estate is shown at Land Registry.

Beneficial ownership: joint tenants v tenants in common Where real estate is owned by, say, two persons as beneficial joint tenants then each person has a 50% interest in the real estate and on the death of one of them their interest automatically passes by survivorship to the other surviving joint tenant (i.e. the interest cannot be passed under a will). However, where real estate is owned as beneficial tenants in common by, say, two persons the beneficial ownership of each can be split 90/10%; 80/20%; 50/50% etc (ie whatever the two persons agree between them). In addition, on the death of one of them their interest may be left by will either to the other surviving tenant in common or any other third party (e.g. their son, daughter etc).

Taxation Any capital gain arising on a disposal (e.g. sale) of real estate is in principle subject to Capital Gains Tax although one or more reliefs may be available to remove or mitigate any such gain (e.g. principle private residence relief).

Where real estate is rented out any rental income (less tax deductible expenses) is subject to income tax on the part of the beneficial owner(s) of the real estate.

Beneficial joint tenants

Rental income arising from real estate held by, say, two persons other than husband and wife as beneficial joint tenants is simply split 50/50.

Beneficial tenants in common

Rental income arising from real estate held by, say, two persons, other than husband and wife, as beneficial tenants in common is split in line with their percentage beneficial ownership (ie 90/10% or 80/20% as appropriate).

Husband and wife The income tax position for spouses who own real estate is slightly different.

If the legal ownership of the property is in the name of both spouses (as often is the case) then for income tax purposes any rental income is automatically split 50:50 irrespective of the underlying beneficial ownership percentage split. Thus, for example, even where the beneficial ownership is held as tenants in common and is split (say) 60/40%, 70/30% or 80/20%, the rental income is still split 50:50 (although on disposal any capital gain is split according to the actual beneficial ownership percentages i.e. 60/40%, 70/30% or 80/20%).

This automatic 50/50% rental income split may be unattractive from an income tax perspective where, for example, one spouse is a higher or additional rate taxpayer and the other spouse is a basic rate or even a nil rate taxpayer. In such a case it would clearly be more tax efficient if any rental income could wholly or mainly be attributed to the basic rate or nil rate tax paying spouse.

This is achievable by ensuring that the spouses own their beneficial interests as tenants in common with the basic rate or nil rate taxpaying spouse owning the larger share and both spouses then filing with HMRC an appropriate declaration to this effect. Such a declaration must be filed using HMRC’s Form 17 “Declaration of beneficial interests in joint property income”.

It is to be noted, however, that any split of rental income must be in line with the underlying beneficial ownership percentages.

Example: Joint spouse purchase Mr and Mrs Smith jointly purchase a property with legal title registered in both names and agree to own their respective beneficial interests as tenants in common 95/5%. Mrs Smith, as a basic rate taxpayer, owning the greater 95% interest. Any rental income is then split 95% to Mrs Smith and 5% to Mr Smith for income tax purposes.

Mr and Mrs Smith will need to complete and lodge Form 17 with HMRC. It must be lodged with HMRC within 60 days of its completion to be valid. It must be signed by both spouses, one signature being insufficient. Both spouses must be living together. It is also necessary to attach evidence of the beneficial ownership split (typically a simple declaration of trust). Any subsequent change of circumstances subsequent to lodging Form 17 must be immediately notified to HMRC.

As noted on Form 17, a declaration is not possible where, inter alia, the real estate is owned as joint beneficial tenants or comprises lettings of furnished holiday accommodation or if legal title to the real estate is in the name of one spouse only.

Practical Tip It is strongly advisable that at the time of purchase the beneficial ownership share of each spouse be formally agreed whether one or both spouses appear on the legal title.

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