In an Investors' Chronicle Portfolio Clinic, Should annuities form part of our retirement income (IC, 11 November 2022), the commentator said that “if you were married, you could have used both of your capital gains tax (CGT) allowances and reduced the amount payable on the recent sale of [your] rental property”.
So is a transfer of allowances permissible between spouses in the case of a capital disposal or is it conditional on the property being held in joint names?
Also, if a married couple jointly own a property and subsequently let it, does the income go to them jointly and split equally for income tax purposes? Or can it be claimed as income by just one partner if this is the tax-efficient thing to do? And would the property need to be transferred into a single name for this to happen? DR
Paul Webster, private client tax director at Kreston Reeves, says:
There are several misconceptions around how spouses and civil partners should declare income and expenditure from the rental of a jointly held investment property.
The starting point is understanding the difference between legal and beneficial ownership. For tax purposes, it is beneficial or equitable ownership that is key. A beneficial owner has the right to benefit from the property and would, therefore, be expected to have entitlement to the income and capital proceeds from a sale in proportion to their beneficial interest. A legal owner is simply the person or persons named on the title deeds and shown as the owner at the Land Registry.
The rules for spouses are somewhat more complicated than those for unmarried couples in terms of registering beneficial ownership with HM Revenue & Customs (HMRC).
Assuming that the spouses are both named on the title deeds, the default position would be a 50:50 split, irrespective of their actual underlying beneficial shares. Invariably, you could have a situation whereby one spouse has provided 100 per cent of the capital and has the rent paid into an account in his or her sole name, which is indicative of beneficial ownership. However, without any beneficial ownership election having been submitted to HMRC, the income split is deemed to be 50:50 for tax purposes.
Declaration of trust
The way to vary the interests would be to make a joint declaration of beneficial ownership, sometimes referred to as a declaration of trust. The declaration can be prepared by a solicitor for a relatively modest fee and stipulates the equitable or beneficial interests in the property. The interests stated must be reflective of the couple’s actual interests in the property.
A declaration of trust can only be made if the property is held as tenants in common, which means that each spouse owns a distinct share of the property. If the property is held as joint tenants they are each entitled to the whole of the property and the income. This is set out in HMRC's Trust and Estate Manual (TSEM9850).
When the declaration of trust has been prepared and signed, it must be submitted to HMRC within 60 days together with HMRC Form 17. If the 60-day window for submission is missed HMRC will deem the election to be invalid.
If you make the election with HMRC within the time limit, the rental income can be split in accordance with the declaration and from the date it was drawn up. The split only applies to the assets specified within the declaration, so if new assets are acquired, a separate declaration needs to be made, otherwise the default 50:50 interest will apply.
Capital gains tax
As well as being effective for income tax purposes, HMRC also treats the property as being held in the same shares for CGT purposes. Any further change in the interests will require a further declaration of trust and Form 17 to be submitted, otherwise the couple go back to square one with a presumed 50:50 split.
It is important to have the correct paperwork in place. If there is no declaration of trust and an inspector of taxes finds that all the income is being declared on one spouse’s tax return because they pay a lower rate of tax, the inspector will issue an assessment on the higher earner for their 50 per cent presumed entitlement. This could also result in earlier years being looked at and penalties being charged, based on how serious HMRC views the omission and the taxpayer’s behaviour.
After a declaration has been put in place, it is advisable to ensure that the income is paid to the spouses in the shares stated. While rent paid into a joint account is fine, having the rent paid into the sole account of one spouse when the other has entitlement is not good practice.
