Form 17: Tips and traps

Lee Sharpe looks at some of the intricacies of an important tax form for spouses and civil partners. 

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This article looks at some of the complications to the Form 17 procedure for married couples and civil partnerships. The regime applies only to legally married couples and civil partnerships, where the spouses, etc., are living together as a couple during the tax year (ITA 2007, ss 836, 837). 

Note, however, that tax law assumes that spouses are living together, unless: 

• they are separated under a court order; 

• they are separated by deed of separation: or 

• they are in fact separated in circumstances in which the separation is likely to be permanent. 

So, for most couples it will be quite a difficult test to fail. For convenience, we shall use ‘married couples’ and ‘spouses’ to include civil partnerships, etc. 

Note that the regime relates only to income tax. It does not speak to capital gains tax (CGT), inheritance tax, etc. A Form 17 notification is also entirely optional. 

The basic framework of the legislation 

For income tax purposes, the default treatment ‘assumes’ that income from property held in the joint names of a married couple is to be split equally. This could be: 

• interest from a bank account in joint names; 

• dividends from a typical shareholding in joint names (but see below); or 

• rental income from a property held in joint names. 

Bank accounts in joint names are likely more common than joint property portfolios, although generally low savings rates and the so-called ‘savings allowance’ typically conspire to make them less of a concern.  

So, by default, it is irrelevant that one of the spouses may have provided the lion’s share of the funding for the asset or receives most (or all) of the income from that asset; both spouses are taxed equally (i.e., 50% each) on the income.  

There are several practically-minded exceptions to this approach, including notably: 

1. income from a partnership between the spouses, so that partnership profits do not have to be taxed equally just because a partnership comprises a married couple; 

2. income from qualifying furnished holiday accommodation, for similar reasons; and 

3. dividends, etc., from close company shares held in joint names – very simply, a ‘close’ company is one controlled by five or fewer shareholders or any number of shareholder-directors, so a typical family company will almost certainly be ‘close’. 

Note that (1) above can apply to a property investment partnership, not just to trading partnerships – readers may well be aware of HMRC’s trenchant insistence that BTL property held jointly is some way from comprising a property partnership. Point (3) prevents a high-income shareholder-director from gaining significant income tax savings simply by putting their family company shares into joint names with their low(er)-income spouse, supporting the ‘settlements’ anti-avoidance regime (ITTOIA 2005, s 624).  

The couple can, however, displace this default approach by jointly notifying HMRC that their income is actually split and should then be taxed according to their actual respective beneficial interests in the property. It follows that they can do this only if their underlying beneficial interest in the property is not 50:50.  

The joint declaration – typically referred to as Form 17 – must be sent to HMRC within 60 days of signing and will remain in effect indefinitely. Form 17 identifies the specific property and income therefrom and requires evidence to be included of the different beneficial interests held by the spouses – typically a deed of trust. 

Form 17 tips 

• Something that is often overlooked is that while the default tax treatment is to apply tax as if the joint incomes were split 50:50, that income can nevertheless actually be split however the couple decides. The default tax treatment does not determine how the income must actually be split between the spouses. However, the Form 17 declaration, if used, is more exacting; income split follows ownership split. 

• The ‘60-day rule’ is often misunderstood to mean that you can submit the Form 17 only within a 60-day period of having changed the ownership split in the assets in question. This is incorrect. The only time-sensitive aspect is the signatures on Form 17; too old, and the declaration will be ignored by HMRC (the rationale prevents back-dating and saying, “please now tax us more favourably, going back several tax years”).  

Example: Changes in circumstances 

Rory and Rhonda are each self-employed, but also have four equivalent rental properties between them, each generating net rental income of around £5,000 per annum. Before they were married in 2015, Rhonda owned three of the properties and Rory had the other buy-to-let property but they put them into joint names when they got married; even so, Rhonda’s solicitor advised that Rhonda’s greater interest was protected by having a declaration of trust drawn up, acknowledging that Rhonda’s equity in the newly-joint portfolio was 3:1 in her favour.  

For several years, they allowed their incomes to be taxed by default as if split equally, keeping their respective total taxable incomes just below the higher-rate threshold. However, Rhonda still took 75% of the net rental income, regardless of how it was taxed.  

Rhonda decided to take a year or two off work to retrain as an MCS-accredited engineer. Rory worked longer hours to support the couple so his income increased, while Rhonda’s fell. During this time, it made sense for the rental income to be taxed more in Rhonda’s favour, so in early 2024, they drew up a Form 17 together, attached a copy of the 2015 deed of trust, and submitted the declaration a few days after it was signed.  

From that point, HMRC should accept a split of income 3:1 in Rhonda’s favour, reflecting her underlying equitable interest in the portfolio of rental properties. This split favours the couple’s tax position while Rhonda’s earnings are reduced; but what happens when she starts to earn significantly more as a certified engineer? 

Form 17 traps  

There are quite a few quirks to the regime, including those set out below: 

• A declaration cannot simply be cancelled. Rory and Rhonda cannot write to HMRC in (say) 2026, stating: “We revoke our declaration”. Ignoring death, divorce, disposal of the assets or permanent separation, they will actually have to change their ownership, albeit this could be by a very modest amount – say from 75:25 to 80:20. 

• It is often assumed that changing the underlying beneficial ownership should then be followed in the couple’s tax returns. In fact, if Rory and Rhonda were to change their underlying beneficial ownership in the rental portfolio to 80:20, their tax returns should nevertheless show an equal income split of investment income going forwards, by default. 

• This default equal treatment would in turn be displaced only by a further Form 17, jointly notifying HMRC of the changed underlying beneficial ownership. However, there is again no deadline for such notification, so if reverting back to 50:50 suits the couple for the time being, a second Form 17 can be postponed, potentially indefinitely. 

• Property held ‘in joint names’ means that both spouses, etc., are recognised as legal owners. While HMRC itself often seems to miss the point, the Trusts, Settlements and Estates Manual recognises (at TSEM9810) that the default 50:50 treatment (and therefore the Form 17 approach to displace it) does not apply to: 

• property owned beneficially by both spouses but legally held only in the name of one of the spouses; 

• property that is beneficially owned by both spouses but legally held by a nominee; or 

• property that is legally owned by the couple and one or more other parties – so, three or more owners. 

Conclusion 

The default 50:50 income tax treatment and Form 17 procedure can seem a little unwieldy, but there is a logic to the regime. Even so, investors should check with a suitably qualified adviser before changing ownership or submitting declarations. Also, a declaration of trust may seem a simple device to evidence ownership, but it typically effects a disposal for CGT purposes. Such transfers between spouses and civil partners will generally enjoy no gain, no loss CGT treatment, but there is no equivalent for stamp duty land tax (or the devolved equivalents in Wales or Scotland) that protects against deemed consideration, where (for example) mortgage responsibilities also change.