Ordinarily, individuals are taxed only on their personal share of any income or gain that arises from an asset that is ‘jointly owned’ with someone else .
However, if you are married, and you and your spouse have jointly owned assets – eg, rental property, bank accounts, shares – HMRC’s default position is to treat all income or gains arising from those assets as belonging 50% to you and 50% to your spouse, regardless of whether or not the actual ‘beneficial interests’ are different.
For example,
Julius and Cornelia are married and live in Burneside, Kendal. Together they own the building which Cornelia’s limited company trades from. The company pays them a rent of £30,000 p.a.
Julius has little to do with Cornelia’s business, he is employed by a national company and is a higher rate taxpayer. Cornelia is a basic rate taxpayer.
Cornelia owns 70% of the building and Julius owns the other 30%. However, they will both be taxed on 50% of the income, so £6000 of the rent that should be taxed at 20% is taxed at 40% instead, costing the ‘family’ £1200 in additional tax..
You can only avoid this treatment, and thereby reduce your tax liabilities to the ‘correct’ level, if you are able to prove to HMRC that your underlying respective ‘beneficial interests’ in the assets(s) are, as a matter of fact, unequal, and you then make an election to be taxed in accordance with those beneficial interests.
If that sounds appealing, and you are ready to consider going through this process, the rest of this article will steer you in the right direction.
In particular, if you would like to change the shares you own in jointly owned ‘real property’ (ie, land and buildings) the first step is to ascertain whether you hold the property as ‘Tenants in Common’ (TiC) or as ‘Joint Tenants’ (JT) (this also has implications for Inheritance Tax (IHT) & the recipient(s) of your property post death – see note 1 below)
If you are married JT, you will need to follow steps 1-3. If you are married TiC, you only need to follow steps 2&3.
If you are unmarried JT follow steps 1&2, and if you are unmarried TiC, just step 2 (but see note 2 also!)
1. ‘Sever the joint tenancy’. This may sound complicated, but in reality it is a relatively straightforward and inexpensive process, so you won’t normally need a solicitor to do it for you, see
https://www.gov.uk/joint-property-ownership/change-from-joint-tenants-to-tenants-in-common
2. Make a gift that results in the required beneficial interests, then evidence the fact with a declaration or deed.
3. Complete and file a ‘joint property election’.
Be careful: none of the above must be backdated!
In fact, the ‘joint property election’ will only ever take effect if it is filed within 60 days of signature by both parties, and even then only as from the date of the second spouse’s signature. It is therefore very important to plan ahead if you are hoping to minimise your tax liabilities, but the savings can be worth the effort. For example:
John & Joan live in Staveley, Cumbria and jointly own an unmortgaged (see note 3) rental property which generates £20,000 taxable profit each year. HMRC split the profit 50:50, so each of them is taxed on £10,000 profit, and John pays £4,000 tax on that income (at 40%), whilst Joan pays just £2,000 (at 20%). Total family tax liability on the rental income is therefore £6,000.
John reads this article and decides to gift Joan his share in the income of property by deed. Together, they then file a valid ‘joint property election’, notifying HMRC of the revised beneficial interests in the property. Subsequently, the total family tax liability on the rental income is £4000, so they save £2000 in tax. Every year!
Note 1
Whether you hold property as Tenants in Common or as Joint Tenants can have a very significant effect on who inherits and how much IHT you pay.
For example:
If you are ‘Joint Tenants’, each person has an ‘interest’ in the property but does not have an actual ‘share’ of the property. On the death of a joint tenant the property passes AUTOMATICALLY (by the law of ‘survivorship’) to the surviving joint tenant(s). Your Will or the Intestacy Rules will make no difference to this fact.
If you are ‘Tenants in Common’ each person owns their own discrete ‘share’ of the property, and on death that share will belong to whoever is specified in their will, or entitled under the intestacy rules (of course, that person can still be your spouse, but there are many reasons why it may be preferable not to leave your share property to them automatically – eg, care home fees, remarriage, IHT planning)
Note 2
The default 50: 50 treatment does not apply to unmarried joint owners, nor does it apply to various other jointly held assets (eg, furnished holiday lets, partnership income etc), but declarations as to what is taxable on each joint owner must nevertheless reflect the underlying beneficial interests, so the new interests, after a gift, will still need to be evidenced.
In addition, whilst there is no Capital Gains Tax (CGT) on a transfer of assets between spouses, in the case of non-spousal transfers, the transaction is treated as having taken place at ‘open market value’ and may therefore be subject to CGT if the asset is standing at a gain at the time of transfer. It may be possible to circumvent this potential problem with use of a trust.
Note 3
If a property is mortgaged and part of it is gifted, there may be Stamp Duty Land Tax (SDLT) implications on the transfer, because the assumption of the mortgage debt by the donee is regarded as ‘consideration’ for the purposes of SDLT calculations, despite the fact that no money actually changes hands.
If you have any questions on the above, or need tax planning advice on other matters you can call me on 015394 32540 or 07881 286903 or email [email protected].