Q: A husband and wife own a property together which they rent out. They do not own equal shares of the property so how do they make an election to split the rental income for tax purposes?
A: Rental income received from a jointly owned property can be treated in one of two ways: either by 50:50 split or by the beneficial entitlement.
For married couples and civil partners, the income is automatically taxable on a 50:50 split as set down in tax legislation, regardless of the beneficial ownership. Beneficial ownership is a legal term where specific property rights (“use and title”) in equity belong to a person even though legal title of the property belongs to another person. This is usually detailed on the land registry and is what is used for tax purposes.
In the situation we have above, we can assume that the beneficial ownership is that of tenants in common and not joint tenants. A tenancy in common is where two or more people own a property in unequal shares, that is, separate legal entities. There is no right of survivorship, but an individual is able to dispose of their share of the house without agreement from the other owners. Joint tenants is where two or more people own the entire property as a composite – equal entitlement to the whole. This type of ownership includes the right of survivorship and any action that takes place must be decided equally – that is, the disposal of the property must be an equal choice, an individual cannot act unilaterally.
As the couple own the property in unequal shares, it follows that they will probably want to tax the income in the same ratio, for example, 70:30. To do this, they will need to make an election using form 17 which notifies Revenue & Customs of the 70:30 split. This form can be submitted at any point to HMRC but it can only be used to reflect the true beneficial ownership (evidence must be supplied along with the form). Form 17 is for the use of married couples or civil partners who are living together and own the property in joint names. There are several conditions under which the form cannot be used:
1) If the couple are in a partnership;
2) If the beneficial ownership elected is different to the actual beneficial ownership (cannot elect to split the income to gain a tax advantage);
3) If neither party has beneficial ownership to the property;
4) A couple are living together and jointly own the property but they are not married or in a civil partnership;
5) The property income is derived from a furnished holiday let.
Ben Chaplin is managing director of Taxwise