What's yours is mine – taxing jointly held assets
QUESTION: I own some residential properties with my wife and I would like to give her some of the income as she no longer works. Can I do this?
ANSWER: There are a few quirks married couples and civil partners with joint assets need to be aware of when it comes to the way any income arising on those assets is divided between them for income tax purposes.
The basic rule which applies as long as the couple are married or in a civil partnership and living together, is that income from property held in both their names is split equally between them for income tax purposes. This applies regardless of whether they are actually entitled to benefit equally from the property. Such jointly held property might include land and buildings, savings accounts, certain shareholdings and intellectual property.
There are some exceptions to this rule including income from partnerships; income from furnished holiday lets, whether in the UK or overseas; income from jointly held shares in a close company; or income from an asset held for the couple by a nominee.
Where this basic rule does apply, a couple who own an asset where one party is beneficially entitled to (say) 90 per cent of the asset and the other to 10 per cent, would each be subject to income tax on 50 per cent of the income from the asset. On a sale or other disposal however, the capital gains tax position would still follow the underlying 90/10 split. The inheritance tax position would also be split 90/10.
If the couple wishes to be subject to income tax on their actual beneficial ownership instead of on the deemed 50/50 basis, then they need to make an declaration using form 17.
Making a declaration using form 17 overrides the deeming rule. That means each of the couple is subject to income tax on their actual beneficial ownership. Making a declaration cannot change the beneficial ownership of the asset. If the couple owns the property 90/10, then they cannot use form 17 to declare a 25/75 split for income tax purposes.
Where a married couple or civil partners hold income-producing assets such as rental property, there is often a desire to reduce their combined tax bill by adjusting the split of income between them. For example, where a couple own a rental property and one partner is a basic rate taxpayer and the other a higher rate taxpayer, ensuring that the lower earner is entitled to more of the rental profits will help to reduce the couple's overall tax bill.
Where the higher earner owns the income producing asset outright, they could transfer a small share to the lower earner and then benefit from the deemed 50/50 split of income on jointly held assets. Or they could go further and transfer more than 50 per cent of the asset to their spouse. Then they could use form 17 to elect for the income tax position to follow the actual beneficial ownership.
If the couple wants to change their beneficial interests in an asset, they can either make a legal transfer between themselves in the appropriate manner for that asset, or make a declaration of trust which confirms the proportions in which the asset will be held going forwards.
The latter approach is common for property, where a declaration of trust is usually cheaper then registering a legal transfer between the couple at the Land Registry. Unless the couple want the deemed 50/50 basis to apply, a form 17 is then sent to HMRC notifying the factual split for income tax purposes.
Before transferring property, all other tax and legal consequences of the change of beneficial ownership should be considered.
:: Malachy McLernon (email@example.com) is a director of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.