Background
It is relatively common for an asset, such as an investment property, to be jointly held in the names of a married couple (or civil partners). The general rule for such assets is the individuals are treated for income tax purposes as being beneficially entitled to the property income in equal shares. This is sometimes referred to as the ’50:50 rule’.
However, this 50:50 rule is subject to certain exceptions. One important exception is if the individuals make a declaration to HM Revenue and Customs (HMRC) of their unequal beneficial interests. This is often referred to as the ‘form 17 rule’, since the declaration is made on form 17. It broadly allows a couple with unequal beneficial interests to be taxed on their actual entitlement to income from jointly held property.
Under the Furnished Holiday Letting (FHL) rules, income from a FHL property owned jointly by a married couple or civil partners could be split in whatever proportion the couple desired, without the need for the form 17 declaration. However, following the abolition of the FHL regime from 6 April 2025, former FHL properties will no longer benefit from the exemption from the jointly held property rules. As such, some joint FHL owners, who are married or in a civil partnership, may need to take action to ensure that they continue to be taxed on their correct share of profits in the future.
Detail
When a property is held in joint names it is generally taxed according to the beneficial ownership position. There are a number of exceptions and one of these is where married couples or civil partners hold property jointly. In these instances the income from the jointly held property is treated as being equally shared between the married couple for tax purposes, irrespective of the actual ownership split. This default position of a 50:50 split for the property income can be overridden by the couple making a form 17 declaration to HMRC to inform them that income is to be taxed in accordance with their beneficial interests.
Prior to 6 April 2025, income from a FHL property owned jointly by a married couple or civil partners was not subject to these jointly held property rules. FHL income could be split in whatever proportion the couple wanted, without the need for unequal beneficial interests or a form 17 election being submitted to HMRC.
However, one of the impacts of the abolition of the FHL regime from 6 April 2025 is that a FHL property held in the joint names of a married couple or civil partners will now be taxed 50:50 on the income arising by default, unless they hold unequal beneficial interests in the property and make a joint declaration of unequal beneficial interests to HMRC using Form 17. Therefore, action may be needed by some joint FHL owners, who are married or in a civil partnership, to ensure that they continue to be taxed on the correct share of profits in the future or the share of profits that provides them with a more tax efficient income allocation.
A Form 17 declaration does not change the ownership split of the property, it merely confirms to HMRC that the property is not owned 50:50 and that the couple wish to be taxed according to their underlying beneficial ownership.
When making a Form 17 declaration there are a number of practical points that need to be considered. These include:
- A Form 17 declaration can only be made if the individuals are beneficially entitled to the income in unequal shares, for example a 60:40 split. If the property is jointly held in equal shares, it is not possible to make a declaration for income to be divided in unequal shares.
- A declaration cannot be made where a married couple or civil partners own the property as beneficial ‘joint tenants’. The couple would need to check that they jointly own the property as ‘tenants in common’.
- HMRC requires evidence that the couple’s beneficial interests are unequal, such as a written declaration or deed of trust.
- The declaration must be made by both spouses jointly.
- The declaration must reach HMRC within 60 days from the date of signature of the last spouse to sign; otherwise, it is invalid. HMRC generally enforces this time limit strictly.
- The declaration cannot be backdated. Only income that arises after the date of the Form 17 declaration is covered. Thus a declaration made very late in the tax year may have little or no effect on the couple’s overall tax position for that year.
- HMRC treats a valid declaration as continuing to apply in later tax years, until one spouse dies, or the couple separate permanently or divorce, or the beneficial interest of a spouse in the property or income changes.
- Whilst it is not possible for the couple to simply choose to end the split of income resulting from the declaration (unless one of the events in the previous point occurs), it may be possible to stop the declaration on form 17 having effect by making a small change to the beneficial interest in the income or property, such as by one spouse transferring part of their beneficial interest to the other. The 50:50 rule would then apply, unless another declaration is made.
Whilst a form 17 declaration can be useful for income tax purposes it is important to consider that there may be other wider tax implications, which depending on the circumstances could for example include stamp duty land tax and inheritance tax. There could also be non-tax implications in transferring beneficial interests in property and legal advice should be sought before changing the capital ownership split of property.
If you have FHL or other jointly held assets and would like any advice or assistance in potentially making a Form 17 declaration, or alternatively would like to discuss any of the issues above then please contact our Tax Director, Jenny Marks.
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