Our current tax regime provides a potential benefit of a historically high level of income tax personal allowance. The increases in the personal allowance in recent years has come at the cost of reductions in the band of income being taxed at basic rate but, in the current year, an individual may have £43,000 of income before higher rate tax applies. Married couples and civil partners have opportunities to double the income limit and they are helped by the tax rules which treat asset transfers between couples as tax neutral. There are however traps for the unwary.
One area that HMRC seem to be paying close attention to at the moment is how rental income is divided between spouses. The law on this point has not changed for many years.
The general rule is where rents are received from an asset held in the names of individuals who are married to each other and living together, the income is shared equally. This rule often works very well for many married couples. Even if the husband has contributed 90% of the capital to purchase the property, the wife is deemed to receive half of the income.
However what if the couple want to allocate more share of the income to the spouse with little other income? It is possible to vary this default position provided that:
- the couple make a joint declaration, and
- they are ‘beneficially entitled’ to unequal shares in the property.
The joint declaration is made on a form – Form 17 – and requests evidence to support the declaration that beneficial interests in the property are unequal, for example a declaration or deed.
Here’s where many couples get into difficulties. If the property is located in England, Wales or Northern Ireland, it is often owned by married couples as ‘joint tenants’. If so, the split is 50/50. The split remains 50/50 even if a declaration of deed is submitted. A necessary preliminary step is to change the ownership of the property from a ‘joint tenancy’ into ownership as ‘tenants in common’. In Scotland, ‘common owners’ is similar in principle to tenants in common.
The rules summarised above do not apply to properties which fall within the definition of furnished holiday lettings and properties held by a partnership where the spouses are partners. In both these cases trading profits may be allocated in any way the partners choose. However, HMRC consider that it is unusual for a couple to be in partnership as the existence of a partnership depends on a degree of organisation similar to that required in an ordinary commercial business.
Please contact us if you wish to consider your options for splitting income.