Do you own assets such as property or shares in joint names or hold joint bank accounts? Most commonly this will be with your spouse or civil partner, but it may be outside of marriage with a long-term partner, sibling or parent, for example. Have you considered how the ownership of such assets affects your liability to tax on them? writes Pearson May partner Jacqui Bowden.
Default Position 
The default way in which income and capital gains/losses are taxed for joint owners is in accordance with the beneficial entitlement, i.e. the underlying ownership of the asset (which is normally in proportion to the capital invested).
The rules are different for married couples or those in a civil partnership. In this situation, the default method of splitting the income arising from a jointly held asset is on a 50:50 basis, regardless of the underlying beneficial ownership.
From a Capital Gains Tax point of view, however, capital gains or losses will always be split according to the beneficial ownership of the asset, whether or not the owners are spouses/civil partners, or unconnected individuals.
An alternative option for spouses/civil partners
If married couples or civil partners do not want a 50:50 split of the income arising from a jointly owned asset, they must declare that the income be split according to each person’s beneficial entitlement. This can be done by making an election to HM Revenue and Customs (HMRC) using Form 17. The election will only take effect from the date that the Form 17 is signed and then only if the form is sent to HMRC within 60 days of being signed. Evidence of the actual ownership of the asset e.g. a declaration of trust/declaration of beneficial interests, must be submitted to HMRC with the form. It is also worth noting that Form 17 can only be used where the asset is owned as ‘tenants in common’ rather than ‘joint tenants’ (see below).
A commonly held misconception is that spouses/civil partners can choose how the income from jointly owned assets is taxed, without considering the underlying ownership of the asset. Take the following as an example:
David and Debbie are married. David works full time earning £90,000 per year and is a higher rate taxpayer. Debbie works part time and earns £12,000 per year and is a basic rate taxpayer. They have recently bought a house in joint names, specifically to rent out and as an investment for their future. If the income is split equally between them, David will be liable to pay tax at 40% on his share and Debbie will pay tax at 20%. They act without professional advice, and decide that a better idea would be to declare the income on their tax returns as 95% to Debbie and 5% to David. After all, Debbie does most of the work in relation to the letting; collecting the rents, organising repairs and paying bills etc.
What David and Debbie haven’t realised is that in the case of married couples, the default position is that the income and expenses must be split equally, 50:50, between the two individuals, regardless of the actual underlying ownership. If the underlying ownership of the property was 95% Debbie: 5% David, then they could complete Form 17 and send this to HMRC in order that the income can be taxed on them on that basis. Otherwise, the default position will apply and they will be taxed on equal shares of the income. If the underlying ownership was anything other than 95%:5%, they could change it to this by making a gift between spouses (at no gain/no loss for Capital Gains Tax purposes) but professional advice should always be sought in advance of any proposed gift as on occasion it can lead to increased tax liabilities.
What is the Inheritance Tax position?
Certain assets (but most commonly land or buildings) may be owned as either ‘joint tenants’ or ‘tenants in common’.
Joint tenants are deemed to own equal shares of the property so, for example, three joint tenants would each have a beneficial entitlement to a third share in the asset. On the death of one of the joint tenants, their share passes directly to the other joint tenants in equal shares. This cannot be changed by any terms included in one’s will.
Tenants in common can own property in any proportion agreed between them, so one could own 60% and the other 40%, for example. An individual’s share in the property does not automatically pass to the other tenant(s) in common on that individual’s death, it can be left to a different person in the Will if desirable.
Conclusion
It is sensible for each individual joint owner of any asset to consider how their share in the asset will be taxed, with respect to Income Tax, Capital Gains Tax and Inheritance Tax, and plan accordingly (where possible) to ensure that the amount of tax payable in respect of the asset is minimised.
The above is for general guidance only and no action should be taken without obtaining specific advice.
