T22 - Your spouse owns 75% of a property and you own the remaining 25%. However did you know that when it comes to taxing the income from the property the Taxman will treat you as equal partners? Is there anything you can do about this?

Taxman's view

50:50 split. When a husband and wife live together, the Taxman normally treats income from any property held in joint names as belonging to them both in equal shares. For these purposes, property includes land, buildings and investments. The income arising from the jointly owned property is split 50:50 and the husband and wife are each taxed on their 50% share. This rule applies even if the property is not actually owned in equal shares.

Actual basis. However, if the property is jointly owned, but is not owned in equal shares it is possible to elect for the income to be taxed on an actual basis.

This is done on Form 17, which must be completed and signed by the husband and the wife The election takes effect from the date that the form is signed. To be effective it must be returned to the Taxman within 60 days of the date of signature.

There are restrictions

Restriction 1. The declaration must be made jointly to be effective. One party cannot make it without the consent of the other.

Restriction 2. A declaration can only be made where the property is actually owned in unequal shares. It is not possible simply to choose to have the income taxed on an unequal basis just because it is tax effective to do so.

Restriction 3. A declaration cannot be made in respect of earned income or income, such as that

from furnished lettings, that is treated as earned income, nor can it be made in respect of income

from a trade or profession that the couple carry on together. A declaration also cannot be made respect of income that is treated as the income of a third party.

Restriction 4. A declaration cannot be made respect of bank and building society accounts. The husband and wife are joint beneficial owners of a joint account and any income arising is paid to both parties jointly.

Optional declaration. The fact that the couple have the choice as to whether or not to make a declaration where property is not owned equally still gives rise to tax planning opportunities.

Tip 1. A declaration is beneficial and should be made where it is more beneficial for the couple to be taxed in accordance with actual ownership, or example if the property is owned in the majority by the spouse with the lower marginal rate of tax.

Tip 2. If it is more beneficial for income to be taxed 50:50 rather than in accordance with actual shares, do not make a declaration. This way it is possible for some income to be taxed at a lower marginal rate, whilst the spouse with the higher marginal rate retains control of the asset.

Paperwork. A declaration should be made soon as possible. It is not possible to backdate a declaration. It also remains in force until the interest on the property or income change or the couple cease to be a married couple living together. Later on, if you no longer want the actual basis to apply, tell the Taxman.