Sarah Bradford examines the default 50:50 rule when taxing income from the jointly-owned property of spouses or civil partners and explains how to avoid falling foul of the rule.
Many married couples and civil partners invest jointly in property, which they rent out to generate an income. From a tax perspective, it makes sense for that rental income to be taxed on the partner with the lowest marginal rate of tax.
However, this is not how the rules work, and without careful planning and organisation it is easy for the tax bill to end up higher than it needs to be.
50:50 rule
The relevant tax legislation (ITA 2007, s 836) provides that if income arises from property held in the names of individuals:
- who are married to, or civil partners of, each other; and
- who live together,
they are treated for income tax purposes as beneficially entitled to the income in equal shares.
This rule applies for income tax purposes for all jointly-held property; not just let property, but also jointly-owned bank accounts, etc.
The legislation also sets out a number of exceptions where these rules do not apply. These exceptions are as follows:
- Income to which neither of the individuals is beneficially entitled.
- Income in relation to which a ‘Form 17’ declaration has been made by the individuals (unequal beneficial interests).
- Partnership income.
- Income from a UK property business which consists of, or so far as it includes, the commercial letting of furnished holiday accommodation.
- Income from an overseas property business which consists of, or includes, the commercial letting of furnished holiday accommodation.
- Income consisting of a distribution arising from property consisting of shares in or securities of a close company to which the individual is beneficially entitled to in equal or unequal shares.
- Income to which one of the individuals is beneficially entitled so far as it is treated as a result of any other provision of the income tax acts as the income of the other individual or the income of the third party.
Where the rule applies, the actual beneficial share held by each party is not relevant; the income is treated as arising to them equally.
It should also be noted that this rule only applies to income arising from property that is jointly-owned by married couples and civil partners – it does not apply in respect of income arising from property owned jointly by unmarried couples.
Example 1: Rental income from jointly-owned property
Alice and Andrew own a two-bedroom property which they let out. Alice has a 90% share of the property and Andrew 10%. The rental income from the property is £10,000 a year. Alice has a salary of £14,000 and no other income. Andrew pays tax at the additional rate of 45%.
The couple were unaware of the default 50:50 rule and assumed that Alice would be taxed on 90% of the income (£9,000) and Andrew on 10% (£1,000), with Alice suffering a tax bill of £1,800 (i.e. £9,000 @ 20%) and Andrew a tax bill of £450 (i.e. £1,000 @ 45%) – a combined tax bill of £2,250.
As the couple have not made a Form 17 declaration, the 50:50 rule applies and they are each taxed on rental income of £5,000. As a result, Alice has a tax bill of £1,000 (i.e. £5,000 @ 20%) and Andrew has a tax bill of £2,250 (i.e. £5,000 @ 45%) – a combined tax bill of £3,250, which is £1,000 more than they were expecting.
Overcoming the general rule: Form 17
Although the 50:50 rule is the default position where property is owned in unequal shares, it is possible for the individuals to jointly elect on Form 17 for any income arising from the property to be taxed by reference to actual ownership shares.
Individuals can make a Form 17 declaration if:
- one of them is beneficially entitled to the income to the exclusion of the other; or
- they are beneficially entitled to the income in uneven shares,
and their beneficial interests in the income correspond to their beneficial interests in the property from which it arises.
The declaration must state the beneficial interests of the individuals in the income to which the declaration relates and the property from which that income arises.
The declaration must be made within 60 days from the date on which it first is to have effect and applies only in relation to income arising on or after the date of the declaration. This prevents a declaration being made retrospectively for a previous tax year.
Consequently, where a couple are not aware of the 50:50 rule and assuming they will be taxed by reference to their ownership shares, they may not realise that they needed to make a declaration until it is too late. There is no opportunity to address the problem for past tax years.
Once a declaration is made, it remains in place until there is a change in either the income to which the declaration relates to the property from which that income arises.
The declaration can be made online (at tinyurl.com/HMRC-Form-17).
It should be noted that making a declaration is not beneficial in all cases; depending on the couple’s marginal tax rates, the 50:50 rule may give a better result.
Example 2: Effect of Form 17 declaration
Following an enquiry into their 2018/19 tax returns, Alice and Andrew (see Example 1) become aware of the 50:50 rule and the need to make a Form 17 declaration for the income to be taxed in accordance with their actual ownership shares, as this is beneficial to them.
The declaration is submitted to HMRC on 1 May 2020 and applies from 6 April 2020. For 2019/20 and earlier tax years, they are each taxed on 50% of the income. However, once the declaration is in place from the start of the 2020/21 tax year, Alice is taxed on 90% of the income and Andrew on the remaining 10%.
It may be necessary to make a Form 17 declaration when a couple get married in order to preserve the status quo. Unmarried couples are taxed on their beneficial share (or in such shares as they agree); the 50:50 rule does not apply.
However, when they marry or enter a civil partnership, they will be taxed equally on the income from joint property unless they make a Form 17 election.
Example 3: Marrying couple
In 2015, Dawn and Dominic buy an investment property. Dominic owns 75% and Dawn 25%. As they are not married or in a civil partnership, the 50:50 rule does not apply and Dominic is taxed on 75% of the rental income and Dawn on 25%.
The couple are to marry in August 2020. From that date, unless they make a Form 17 declaration they will be each be taxed on 50% of the rental income. If Dawn pays tax at a lower rate than Dominic, this will be beneficial and there will be no value in making a Form 17 declaration – the 50:50 rule will give a lower combined tax bill.
However, if Dominic pays tax at a lower rate than Dawn, they will need to make a Form 17 declaration once they are married if the status quo is to be maintained. This should be done within 60 days of their wedding day for it to apply from that date.
Determining the beneficial interests
There are only two options for married couples and civil partners when it comes to the split of income from joint property for tax purposes – 50:50 or in accordance with actual beneficial interests. Determining each individual’s beneficial entitlement will not always be straightforward; beneficial entitlement may not be the same as legal ownership.
Guidance in HMRC’s Capital Gains manual (at CG70230) states that there is no single factor that determines beneficial entitlement to land. However, HMRC sets out the following indicators that a person has beneficial ownership of land:
- they hold legal title;
- they occupy the land;
- they receive any rental income from the land;
- they provided funds to purchase the land;
- they received the sale proceeds from a disposal of the land.
In the absence of evidence to the contrary, the legal owner will normally also be regarded as the beneficial owner.
Practical tip
Married couple and civil partners who live together and who jointly own a rental property in unequal shares should assess whether it is preferable for the income to be split 50:50 for tax purposes or for them to be taxed according to their ownership shares. If the latter, they must make a Form 17 declaration. Couples who wish to change their ownership shares can take advantage of the no gain/no loss rules to transfer interests between them.
