Richard Coombs, Tax partner at Bates Weston consider tax efficient rental income and the significance of Form 17.
“Married couples or civil partners have for many years been able to reduce their tax bill on jointly owned investment property by ensuring that the ownership of that property is split in the most tax efficient way (so the lower rate payer receives more of the rental income, for example). The rules are not particularly complicated but are regularly misunderstood and mistakes can be expensive and therefore it pays to get it done correctly from the start.
The starting position is that any property held jointly between two people is, for tax purposes, treated as being held 50:50 and therefore in the absence of any further action all income will be split equally between the two owners.
An obvious planning technique for a married couple or civil partnership, where one of the owners is either a non-tax payer or pays tax at a lower rate to the other, is to alter the ownership so that the non-tax payer becomes entitled to more (or all) of the rental income.
This can be achieved either by formally transferring legal and beneficial ownership to the other party (which will usually require the services of a conveyancing solicitor), or simply by one party declaring that they hold their half on bare trust for the other.
What the above step does is alter who is beneficially entitled to the income from a legal perspective. However, to be effective for tax, a Form 17 must be filed with HMRC, which basically allows the tax treatment to follow the legal treatment where the property is held in unequal shares.
This is where problems start to occur. The following points must be understood before going down this route:
- This only works where the property is owned jointly as “Tenants in Common”. Property held as “Joint tenants” cannot utilise this treatment. Accordingly, the first step is always to ensure that the type of ownership is established at the outset.
- Filing a Form 17 is, in itself, not sufficient to split the income unequally for tax purposes. All Form 17 does is to allow you to follow the legal position where the legal ownership is not 50/50, and therefore if no declaration of trust or formal transfer has been executed then the filing of the form has no effect. We have seen this on a number of occasions where the client has tried to do some “DIY” tax planning and simply filed a Form 17 electing to treat the income to be split in a different ration than the legal reality.
- Likewise, simply declaring a trust to alter the beneficial ownership is not sufficient. Without a Form 17 it is ineffective for tax. The Form 17 must be filed within 60 days of the execution of the legal documents and must be filed by both owners.
- Once a Form 17 has been filed, you cannot pick and choose which years you want to be taxed unequally and which you want to be taxed equally. The Form 17 stays in place until the death of one of the owners, legal separation of the owners or if the beneficial ownership is changed. This last point does offer some planning opportunities if the couple wish to alter the split.
Proper tax planning in this area can be very effective, but getting it wrong can be very expensive. Make sure you understand the rules or ask a tax professional to help you.”
If you would like our help in planning tax efficient rental income, please do get in touch with Richard Coombs.
This guidance is generic in nature and does not constitute advice. You should take no action based upon it without consulting ourselves or your own