Use of Form 17 to apportion income on Jointly Owned Property

TopCatLandlord

I originally posted this on the Property Forum, but have been advised it might be better placed here, even though my objective is not really to save tax, just to make life simple. Now please read on - and thanks for looking.....................


I have just bought a buy to let flat and have now rented it out.

I financed the purchase, 100%, from savings, but my wife and I have the property registered jointly (NOT Tenants in Common) to make life easier when one of us dies. We have no dependants.

My wife and I are both basic rate tax payers. I am registered for self assessment (I have a small income from some shares) but no longer work and do not yet get a pension. My wife is just on PAYE.

My intention is not to save tax (though that would be nice!) but to keep life simple and save doing self assessment for my wife and having to split income and costs 50/50 and in any case she is not involved.

So here is the question: Can I simply use form 17 to state that the income and costs are 100% mine and 0% my wife’s, if I send a covering letter explaining how it was financed.

I see that HMRC are instructed to reject the form if the percentage Property and Income Interest are not the same. If it makes no odds to make them the same 100/0 and ownership will stay as joint ownership its not issue.

I’ve spent ages trawling for the answer but to no avail. All very confusing.

Thanks for any input.

Tony

Nicola_Ed

Hi - below is an extract from the HMRC guidance. Highlighted in red where appropriate but the last line is key. The point in issue is ownership, not source of savings, and I believe that joint ownership can never be anything other than an equal 50/50 split meaning the income has to be split in the same way.


Jointly owned property - husband & wife or civil partners

Husbands and wives or civil partners living together should generally be treated as entitled in equal shares to income from jointly held property. See:

• ICTA88/S282A for years up to 2006-07, and
• ITA07/S836 for 2007-08 onwards.

However, this rule will not apply in any of the following instances:

• the income is earned income (or, like furnished holiday lettings, treated as earned income) - ICTA88/S282A (4)(a), ITA07/S836 Exception D,
• there is actually a partnership - ICTA88/S282A (4)(b), ITA07/S836 Exception C,
  • in this case the income is divided according to the terms of the partnership agreement,
• both husband and wife, or both civil partners, have signed a declaration under ICTA88/S282B or ITA07/S837 stating their beneficial interests in both the property and the income arising from it,
  • but a declaration is only valid if their interests in the income and in the property itself correspond.

pjclar02

Hello there


The key issue for income and capital gainstax purposes is "beneficial ownership" of the properties, which is different to the legal ownership.


You can change the beneficial ownership of the properties through a simple declaration of trust, changing this to 100/0 or any other proportions you like. You will then need to submit this declaration of trust to HMRC with your Form 17 for this to be valid.


You can change the beneficial ownership again later by executing a new declaration of trust if you wish.

TopCatLandlord

Thank you.


That was the track I was on. In all my reading there does appear to be a difference of opinion.


Some think that beneficial ownership has to reflect legal ownership others do not.


I may just have to bite the bullet and try and get an opinion from HMRC - Oh God another day on hold!


Its certainly as clear as mud.


Tony

pjclar02

I can confirm categorically that beneficial ownership does not have to reflect legal ownership - if it did then presumably there would be no need for the two separate terms!


I have advised many clients to do this and also as I have done it myself and received a nice letter from HMRC that it is acceptable for the income to be split in accordance with the benefcial ownership - which in my case is 99:1 for properties that are legally owned as joint tenants.

TopCatLandlord

Excellent!


I had come to the conclusion that the form had no point if you could not do this but assumed I must be missing something.


I shall fill out the form with a brief covering letter explaining the situation.


Many thanks




:T

TopCatLandlord

One more quick question.


Having completed the Form 17 showing a new split of 100/0 do future capital gains follow legal ownership (ie 50/50) or beneficial ownership (100/0).

anselld

TopCatLandlord wrote: »

I had come to the conclusion that the form had no point if you could not do this but assumed I must be missing something.:T

The form has no point in your case because you are not allowed to use it (on its own) for what you are trying to do!

Have you read the notes?
http://www.hmrc.gov.uk/forms/form17.pdf

I am not convinced that pjclar02 method works for married couples either. The Form 17 notes are quite clear that you must own the property in unequal shares.

pjclar02

anselld wrote: »

I am not convinced that pjclar02 method works for married couples either. The Form 17 notes are quite clear that you must own the property in unequal shares.

If the declaration of trust is executed then they will hold the property in unequal shares - that is the whole purpose of the declaration of trust. To convert a property that is benefically owned 50:50 to a property that is owned in unequal proportions.

Once you have done this, then Form 17 is relevant - this is the reason that the declaration of trust has to be sent in to HMRC with Form 17. Therefore, I think the OP's suggestion of sending a covering letter will not work - you would need to draw up the declaration of trust first and send this to them.

In response to the other question - capital gains tax is based on beneficial ownership also.

00ec25

So what you are saying is that a deed of trust addresses the requirement that the (form 17) declaration must reflect reality for married couples?
http://www.hmrc.gov.uk/manuals/tsemmanual/tsem9850.htm

"Married couples 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
a) each spouse is in fact entitled to a share other than 50/50 in the property and
b) the share that a spouse or civil partner has in the income is the same as their share in the property"

So the deed of trust in effect "converts" the beneficial joint tenancy (arising by default from the legal ownership share) into the desired beneficial unequal (tenants in common) share.

If so then as we know, the Form 17 declaration is valid as long as that % "share" is the same as the claimed income % and the deed of trust (not a covering letter) is submitted to comprise HMRC's required supporting evidence.
http://www.hmrc.gov.uk/manuals/tsemmanual/tsem9851.htm


For CGT it is indisputably beneficial ownership
http://www.hmrc.gov.uk/manuals/cgmanual/cg11730.htm

however, the fact that the OP financed the purchase entirely by himself would need to be tested against whether the wife has made any contribution to the property herself and thereby quantified the extent of her own beneficial interest should the need arise to dispute the respective beneficial shares - for obvious reasons the rules around this stem from divorce settlements...
http://www.hmrc.gov.uk/manuals/cgmanual/CG65310.htm

anselld

pjclar02 wrote: »

If the declaration of trust is executed then they will hold the property in unequal shares - that is the whole purpose of the declaration of trust. To convert a property that is benefically owned 50:50 to a property that is owned in unequal proportions.

.

So just to be clear, you have successfully tested this for married couples?