Tax Saving Jointly Held Assets

Property and other types of investments are frequently held jointly by married couples. This is a fertile ground for tax planning, especially when one partner is a higher-rate taxpayer.

To make the most of a spouse’s allowance and basic rate income tax bracket, rethink the ownership percentages. This is conventional tax planning, and shifting assets to a lesser-earning spouse can cut tax on rental income or bank interest relief to 20% from 40%. Now the question is, how exactly should this transfer be executed?

The first choice is to talk to a solicitor about changing the legal titles of the property so that your spouse can have a significant interest in it. For example, to tax the wife on 75% of rental income, the property could be owned 75% by the wife and 25% by the husband. This is a legal transaction; married couples are not required to retain assets in joint names. Instead, they can split joint assets and keep some of them for their use. Each spouse is subject to tax on the income from any assets held in their names, regardless of whether or not they are jointly taxed. HMRC wouldn’t mind if joint assets were split up as long as it was done in a compliant way following proper planning and guidelines.

There can be problems when one spouse retains an interest in an asset held by the other even after the division. The asset’s original owner may get all the income taxed under settlements legislation. For example, if you retained an interest in the income from a bank account credited or transferred to your spouse, you could be taxed 50% of the income.

For tax reasons, spouses typically get income split equally in a jointly held property. However, when the actual split is different, a couple can be taxed based on the share of income received. This can be done by filling out Form 17, obtainable through the HMRC website, and declaring beneficial interest in the property.

Please note that a married couple does not have the choice to have their income taxed in any manner they see fit. For tax purposes, you can deviate from the standard 50-50 split if each spouse is entitled to a share in the property that is not equal to 50-50 and the claimed income equivalent to their share in the property—the declaration on Form 17 details beneficial ownership percentages.

However, in the case of a bank account, you would need to alter your ownership from “beneficial joint owners,” for example, through a deed. This is an important step. After a declaration has been made, it will continue to be valid unless and until your interests in the capital or income change. However, consider that the form can only be used to report income earned after the day that the declaration and form were issued.