ATXP6 UK
Syllabus A1. Income tax A1e. Property and investment income

A1ei. Jointly owned property by a married couple/civil partners

Syllabus A1ei)

Advise on the tax implications of jointly held assets

Understand the treatment of property owned jointly by a married couple, or by a couple in a civil partnership.

  • If assets are owned jointly then the rule is that any income generated from the asset must be split 50:50.

  • It is possible to make a declaration of beneficial interest in order that the joint income is split in order to the actual entitlement.

  • If one spouse does not own any shares in the property, shares can be transferred to that spouse to result in actual entitlement. 

    Transferring just 5% of shares can result in actual entitlement of 50% to income. If more shares are transferred, then more income can be legally transferred.

  • Ideally, to be tax efficient, the declaration should assign more income to the individual who is a lower rate tax payer and potentially has some unused personal allowance. 

    The overall objective is to save tax for the family as a whole.

Illustration:

A couple has a joint property of which generates annual income of £100,000. 

The husband contributed nothing towards the purchase of the house and the wife contributed 100% towards the purchase of the house. 

How will this income be split if no declaration is made?

Solution:

If no declaration is made, then the income will be split in the following manner:

Husband   £50,000
Wife £50,000

Illustration:

For the same couple above, the following information relates to their yearly income aside from the property income.

  • Husband: £100,000 salary per annum.

    Wife: Not earning

  • If the declaration is made to split the income according to actual entitlement, how much income tax will be saved as a couple?

Solution:

Current situation

Husband 
Salary £100,000
Property income  £50,000
Total income  £150,000
P.A. Nil (Income above £123,700)
Taxable income  £150,000
Wife
Property income  £50,000
Total income £50,000
P.A.  (£11,850)
Taxable income  £38,150

Income tax liability

Husband
£34,500 * 20% =  £6,900
(£150,000 - £34,500) * 40% = £46,200
Total £53,100
Wife
£34,500 * 20% = £6,900
(£38,150-£34,500) * 40% = £1,460
Total £8,360

Note

  • The husband is already paying tax at a higher rate and with the £50,000 property income, he will not have any personal allowance remaining.

  • Therefore, the husband and wife should make a declaration so that the husband is able to use his personal allowance, as both individuals are already paying income tax at the higher rate.

  • A declaration should be made to transfer 100% of the property income to the wife so that both individuals can utilise their personal allowances fully.

    This will save them tax at £11,850 x 40% = £4,740 (At ATX - UK this kind of short cut calculation is expected. 

    The long version is shown below for completeness

After declaration:

Wife and Husband

Income tax liability (same calculation for both husband and wife as they both now have income of £100,000 less the personal allowance)

Property income £100,000
Total income £100,000
P.A.   (11,850)
Taxable income £88,150

Income tax liability

£34,500 * 20% =  £6,900
(£88,150 - £34,500) * 40% = 21,460
Total 28,360

Income tax liability

The liability of the husband and wife will both be the same - as they are earning the same amount after making the declaration.

Total liability of husband and wife before declaration (£53,100 + £8,360) £61,460
Total liability of husband and wife after declaration (£28,360 + £28,360) (£56,720)
Tax saving £4,740

Note:

  1. A joint bank account will always be taxed 50:50 regardless of who contributes what amount.

  2. If shares are owned, dividends are always divided according to the exact proportion to which each is actually entitled, it is never assumed that it is in equal proportions.