Like many things, the allocation of income between spouses is a common area allowing some simple planning but there are rules for the unwary.
One such area that HMRC seem to be paying close attention to at the moment is how rental income is divided between spouses. The law on this point has not changed for many years. Leaving aside true property businesses and FHL, where rents are received from a jointly-owned asset, then the income is split 50/50 by default under s836 ITA 2007.
However, it is possible to vary this under s837 provided that:
- a joint election is made (on Form 17); and
- they are beneficially entitled to unequal shares of the income.
Form 17 requests proof of the second point. If property is owned as joint tenants, then the split is 50/50. Property can be owned in unequal shares as tenants-in-common but this would require some sort of paperwork to be in place.
'However, where the joint owners are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless:
- both entitlement to the income and the property are in unequal shares, and
- both spouses, or civil partners, ask their respective tax offices for their share of profits and losses to match the share each holds in the property.
If a taxpayer's only income from land and property in the UK comes from a jointly owned property, that share alone will form the rental business. If a taxpayer has other income from land and property in the UK, whether in their name alone or owned jointly with other people, their share from the jointly owned property will form a part of their rental business along with the other income and expenses on any other properties which they own alone. Once again, however, shares held in a different capacity (partner, trustee, executor) must be kept separate.'
It appears HMRC are taking more interest in this point, so forewarned in forearmed!