Form 17

Lee Sharpe reviews a deceptively simple income-sharing tax device for spouses and civil partners.

Introduction

It was the FA 1988 which introduced various provisions to separate the taxation of spouses from April 1990; previously, a married couple would broadly have been assessed as a ‘unit’. Going forwards, where a couple holds an asset in joint names, then any investment income arising therefrom is by default divided equally between them – 50:50. (The legislation for this is now at ITA 2007 s 836, and now applies also to civil partnerships, although we shall refer only to spouses, for brevity; do check the legal treatment of joint ownership in the devolved nations.)

Example – The Perk

George earns £45,000 a year, while his spouse, Mildred, earns £44,000 a year. In April 2023, George inherits his parents’ former home but lets it out rather than selling it. The annual rental profit will be £12,000, so if George were to receive 100% of the rent, he would pay 40% tax on the £6,730 of his combined taxable income above the Higher Rate Threshold (currently £50,270).

Worse, his total adjusted income would be £57,000, so he would have to repay 70% of the £2,900 in Child Benefit that Mildred currently receives for their three young children, through this tax return (the High Income Child Benefit Clawback is assessable on the spouse with the greater income, at 10% for every £1,000 of income above £50,000):

However, if George adds Mildred as owner of the property in joint names, then the legislation automatically splits the income 50:50, regardless of the actual split in beneficial ownership. Note that just because the taxman says spouses should sometimes be assessed as if their income is split equally from property in joint names, this does not mean that the income must actually be split equally:

Formally adding Mildred as joint owner of the property could save this couple as much as £3,000 in tax. This is straightforward and at least arguably fair. But this simple default treatment ignores the ‘real’ split of ownership and is a somewhat blunt instrument.

Suppose Mildred had no earnings at all, so had her entire tax-free personal allowance of £12,570 to spare. George does not want to give the property to Mildred outright, but it would clearly be better if Mildred took more of the income – say 90% of it. So, how to break the 50:50 default treatment? This is where Form 17 comes in.

The spouses have the option to make a joint declaration to HMRC, to the effect that their income should be split in proportion to their actual, underlying beneficial interests (ITA 2007 s 837). So, George could give 90% of his former family home to Mildred, and they could then make a joint declaration on Form 17 to HMRC. Mildred could then receive £10,800pa tax-free, leaving George taxable on the remaining 10% – £1,200 – at just 19% (£228).

Of course, a transfer of a CGT-able asset between spouses, or part-shares therein, is usually free of CGT by virtue of TCGA 1992 s 58, so CGT will not normally be a concern. But there are numerous pitfalls to consider:

The Form 17 and supporting evidence must be lodged with HMRC no more than 60 days from declaration (signature); otherwise, it is ignored, even though HMRC may ‘know’ that the ownership is not divided equally. This is not saying that George and Mildred must notify HMRC of a change in ownership within 60 days of the change; they could have owned a rental property 75:25 for ten years and then make a declaration, but that declaration will apply only to income received since that declaration – and only if the declaration is validly notified.
The spouses must be “living together” – see ITA 2007 s 1011. Not as Draconian as it might appear, essentially, a couple will be presumed to be living together unless formally separated, or separated as a matter of fact where that separation is likely to be permanent.
The couple has a choice of splitting their income along the default 50:50 or according to their actual beneficial interests in the property specified. This is less flexible than for co-owners who are not a legal couple, etc., who can agree to split the income broadly as they choose, subject to the Settlements anti-avoidance regime (see HMRC’s Property Income Manual at PIM1030).
The declaration cannot be reversed or cancelled. But, aside from death, divorce or permanent separation, it can (also) be voided by the couple changing the division of their underlying beneficial ownership, even a little – at which point the income split automatically reverts to 50:50 for tax purposes, unless or until the couple correctly lodges a fresh Form 17 to notify the new division. A couple can change their underlying beneficial ownership of given property as frequently as they like – and submit corresponding Forms 17 as often (or infrequently) as they choose.
CGT-free does not necessarily mean ‘tax-free’. A gift of real estate may have SDLT implications (or the devolved equivalents), such as where a property is mortgaged. It is conceivable that there may also be VAT implications where the property in question is VAT-able.
The regime applies more widely than some realise – ‘property’ in the legislation does not mean only real estate but also assets such as investment portfolios or bank accounts in joint names (but watch shares in small or family ‘closely owned’ companies).
The regime applies more narrowly than some are aware:
There are specific exceptions to the default 50:50 rule, including property held in partnership or as Furnished Holiday Accommodation, so a Form 17 could not cover such assets.
HMRC also says it cannot apply to property held in joint names between spouses and then jointly with other parties. Likewise, property beneficially owned by the couple but legally owned on their behalf by a nominee or similar.
A Form 17 applies only to the property specified in that particular declaration: George cannot say, “going forwards, Mildred and I want all of our property income to be split 25:75, including any investment property acquired (and so beneficially owned) in future”.
The overall regime applies only to property formally held ‘in joint names’, so it will not apply where one spouse alone formally owns a property but holds a proportion of it ‘on trust’ for the other; this may be a surprise even for some advisers, but HMRC’s guidance, long-forgotten to all but the most ancient practitioners, used to say: “The 50:50 rule does not apply…where property is held in the name of only one spouse even if the other has a beneficial interest; there will be a trust and the split follows the entitlement of each spouse to the income”.

Conclusion

The above rules were intended to act as a reasonably fair and simple ‘fix’ for spouses and civil partners, so that one-half of the couple does not end up being taxed excessively. The default regime will typically work well enough for couples whose tax-adjusted incomes are broadly matched, perhaps less well where one spouse’s income is significantly more than the other, in which case a deliberately different split in ownership and a valid Form 17 notice to HMRC may be preferable. Once the Form 17 aspect is engaged, however, it requires monitoring to ensure it continues to work as intended.