Debbie Reyland highlights tips and pitfalls to look out for when using Form 17 for jointly owned property.
----------------------
This is a sample article from our property tax saving newsletter - Try Property Tax Insider today.
---------------------
Unsurprisingly, income received from jointly owned property is usually allocated between the owners on the basis of beneficial ownership. However, this is not the case for married couples or civil partners (referred to here as spouses) who live together and own property jointly outside of a formal partnership. Instead, a default fiction of a 50:50 split for income tax purposes only applies (courtesy of ITA 2007, s 836(1)).
For this purpose, spouses are presumed to be living together unless:
-
separated under a court order or deed of separation; or
-
actually living apart when the separation is likely to be permanent (ITA 2007, s 1011).
Property includes not only real estate but also bank accounts and investment portfolios in joint names, excluding small company shareholdings.
The effect of the 50:50 allocation depends on the marginal tax rate of each spouse.
Example: Unequal beneficial ownership
Mark and Holly, married with two children, receive rental income of £20,000 from their jointly owned investment property, with the beneficial interest allocated 80% to Mark (£16,000) and 20% to Holly (£4,000). However, for income tax purposes, Mark and Holly are each taxed on rental income of £10,000.
So, if Holly is a higher rate taxpayer while Mark pays tax at the basic rate, the 50:50 split of rental income increases the couple’s overall tax burden. Holly pays tax at 40% on £10,000 instead of on the £4,000 she actually receives, and Mark’s tax liability is £2,000, resulting in a total income tax liability of £6,000 for the couple.
Adding to the pain, if the property is mortgaged, Holly only receives basic rate tax relief on any interest paid. The rental income may even take Holly’s adjusted net income (i.e., after deductions for pensions and gift aid donations) over £60,000, when she will be liable to the high-income child benefit charge.
Of course, if the situation were to be reversed, so that Mark was the higher rate taxpayer, the couple would actually pay less tax under the 50:50 rule.
Thankfully, to avoid a couple’s income tax position relying on the vagaries of such circumstances year on year, there is an override which can be deployed to take control and mitigate income tax exposure.
Splitting income differently
To that end, the list of exceptions to the 50:50 rule (ITA 2007, s 836(3)) includes a declaration of unequal beneficial interests in both the property and income (under ITA 2007, s 837). This requires the submission of Form 17 to HMRC.
If Mark and Holly (see above) make a valid declaration, HMRC will accept the 80:20 split of income in Mark’s favour from the date of signature. This results in a reduction in the couple’s overall income tax liability to £4,800, as Mark now suffers tax of £3,200 on income of £16,000, and Holly’s tax liability reduces to just £1,600.
The use of Form 17 is only available where the property is legally held by both spouses, without other parties or nominee arrangements involved. Similarly, when just one spouse legally owns the property, Form 17 cannot be used. So, if Mark inherited the property himself but had declared Holly the beneficiary of 20% of the income, Form 17 is not required.
All about ownership
There are, in fact, two types of joint ownership which determine the tax planning options available. Tenants-in-common each own a specific share of the property, which can be left to any chosen beneficiary on death. In contrast, joint tenants own rights to the whole property, so that the share of each co-owner automatically passes to the survivor on death. For married couples, the default ownership model is usually joint tenancy. As an aside, Scottish law broadly uses the same principles with different terminology.
In order to submit a valid Form 17, any joint tenancy will need to be severed and changed into a tenants-in-common ownership. This is relatively easy to achieve as one spouse simply notifies the other of the severance and submits the relevant forms to the Land Registry. Obviously, any mortgage provider will also need to be informed.
Unequal shares
With a tenants-in-common arrangement, each party needs to actually own the property in unequal shares. This can even be taken to extremes, such as 99:1 according to HMRC in their Trusts, Estates and Settlements Manual at TSEM9848. The new ownership proportions of the named property must be evidenced, usually by a written trust or deed.
There are also implications for other taxes. While the transfer of a part of an asset will be treated as a ‘no gain, no loss’ transfer for capital gains tax purposes (under TCGA 1992, s 58), and covered by the spousal exemption for inheritance tax purposes (under IHTA 1984, s 18), a potential problem arises if the property (e.g., in London) is mortgaged. This is because there is no corresponding spousal exemption for the purposes of stamp duty land tax (SDLT) and other land taxes, so that chargeable consideration includes the proportion of debt taken on by the recipient spouse.
The form itself
Each specific property must be identified on Form 17, the related income and the different beneficial interests held. Once completed onscreen and printed off, Form 17 must be signed by both spouses and posted to HMRC along with supporting evidence, which is listed in HMRC’s guidance at TSEM9230.
The form must arrive at HMRC within a strictly applied time limit of 60 days from the date of the last signature; otherwise, the form is void and the 50:50 allocation remains in situ.
Immediate impact
As income will only be allocated according to the proportions stated on Form 17 from the date of the declaration (ITA 2007, 837(4)), it is best to sign and submit it as soon as possible. Timing is even more important given the imminent 2% uplift on all property income tax rates from 6 April 2027.
The form will continue in effect indefinitely (see TSEM9864) until:
-
the beneficial interests in the property or income are changed;
-
one spouse dies; or
-
the couple permanently separates or divorces.
The longer term
An opportunity therefore arises to subsequently cancel the Form 17 by changing (even by 1%) the beneficial interests between the spouses (ITA 2007, s 837(5)). Crucially, it is important to appreciate that the default 50:50 split then revives until another Form 17 is submitted.
In fact, with a change of income profiles between spouses (e.g., if Holly takes a career break in the above example), it may be preferable for equal apportionment to then apply, with the option to submit another Form 17 in the future. The process of changing beneficial ownership and using Form 17 can be undertaken as many times as needed, albeit with a requirement for diligent record-keeping.
A word of warning, as a change in beneficial ownership could bring those couples with larger property portfolios or separate self-employments within the clutches of making tax digital (MTD), particularly in future years. MTD requires the aggregated income (not profit) enjoyed by each individual to be compared to the entry threshold, which reduces to only £30,000 from April 2027 (based on 2025/26 figures) and then £20,000 from April 2028. Inadvertent MTD entry would lead to compulsory digital records, quarterly reporting and exposure to penalties.
Practical tip
While the Form 17 process can lead to income tax savings, other taxes should not be ignored, and transferring actual ownership can have long-term implications. It is also vital that the effect of the latest Form 17 submission is continually monitored to ensure that the tax consequences continue as intended. Professional advice should be sought where necessary.
