It is relatively common for an asset (e.g. an investment property) to be jointly held in the names of a married couple (or civil partners). The general rule is that those individuals are treated for income tax purposes as beneficially entitled to the property income in equal shares. This is sometimes referred to as the ’50:50 rule’.
Splitting income differently
However, this 50:50 rule is subject to certain exceptions. One important exception is if the individuals make a declaration to HM Revenue and Customs (HMRC) of their unequal beneficial interests. This is sometimes called the ‘form 17 rule’ (i.e. as the declaration is made on form 17). It broadly allows a couple with unequal beneficial interests to be taxed on their actual entitlement to income from jointly held property.
Points to watch
The form 17 process appears straightforward. However, in practice there are various issues and potential problems, some of which are outlined below.
- Husband and wife (or civil partners) should check that they jointly own the property as ‘tenants in common’. A form 17 election cannot be made (i.e. the property income cannot be split other than in equal shares) if the couple own the property as ‘joint tenants’.
- HMRC requires evidence that the couple’s beneficial interests are unequal, such as a written declaration or deed.
- If the property is jointly held in equal shares, it is not possible to make a declaration for income to be divided in unequal shares.
- The form 17 rule therefore applies if the individuals are beneficially entitled to the income in unequal shares.
- The declaration on form 17 must be made by both spouses jointly. For example, it cannot be made by one spouse if the other disagrees.
- The declaration on form 17 must reach HMRC within 60 days from the date of signature of the last spouse to sign; otherwise, it is invalid. HMRC generally enforces this time limit strictly.
- The form 17 rule only applies to income arising from the date of the declaration. Thus a declaration made very late in the tax year may have little or no effect on the couple’s overall tax position for that year.
- HMRC treats a valid declaration on form 17 as continuing to apply in later tax years, until one spouse dies, or the couple separate permanently or divorce, or the beneficial interest of a spouse in the property or income changes.
- Whilst it is not possible for the couple to simply choose to end the split of income resulting from the declaration (unless one of the events in the previous point occurs), it may be possible to stop the declaration on form 17 having effect by making a small change of beneficial interest in the income or property, such as by one spouse transferring part of their beneficial interest to the other. The 50:50 rule would then apply, unless another declaration is made.