Share this content
14

Does Form 17 apply to expenses too?

Income split 99/1 but expenses shared 50/50

Didn't find your answer?

We all know that Form 17 and a Declaration of Trust overrides the default 50/50 rule for married couples with joint income, but what about the expenses? Do they have to follow the same % as the income, be split 50/50 or can the spouses split them any way they choose?

Let's say a married man owns 100% of a rental property. He and his wife then move house and let out their old home which is in joint names. He is a 40% taxpayer so they sign a DoT and Form 17 giving 99% to her. However, the mortgage is in joint names and is left unchanged. The lender should probably be informed but let's forget that legal nicety for a minute. They are jointly liable for the mortgage payments, so it would seem appropriate to split them 50/50, even if they are paid out of the rent. As you can still claim 25% of the interest for 2019/20, this has the effect of reducing their overall tax bill. Next year of course it won't make any difference, but in principle the same applies to other joint costs, like insurance and maintenance, so still worth splitting these 50/50 going forward.

The HMRC manual seems to suggest that profits should be split in line with Form 17, but Form 17 itself only refers to income, so it seems to me a husband and wife are at liberty to split joint costs any way they choose, just the same as unmarried couples.

Normally this would be inadvisable if just one property is involved and he only pays tax on 1% of the rent, but in this case the husband has another property 100% in his name, and as it is all one letting business, he can offset the costs from both properties.

If spouses are indeed at liberty to split the costs any way they choose, irrespective of Form 17, then presumably the husband could claim 100% of the costs and offset them against the rent from his other property. That might even be enough to avoid 40% tax altogether, not to mention Child Benefit tax.

This might seem a bit dodgy, but suppose the mortgage was solely in his name and the rent was split 99/1 in his wife's favour. Would HMRC allow the wife to claim any of the interest, given that she has no legal obligation to pay the mortgage? Presumably not, so it seems to me they can't insist on the husband only claiming 1% on a joint mortgage. They would be having it both ways otherwise, and we know the taxman never tries to do that.

Am I missing something here or could this be a perfectly valid tax planning strategy?

Replies (14)

Please login or register to join the discussion.

avatar
By Paul Crowley
09th Sep 2020 00:20

Hope that scenario does not apply.
Counter intuitive and would lead to irrational results.
One party makes losses, other has super profits.

Over to you Tax Dragon for your now once a day post

Thanks (0)
Replying to Paul Crowley:
By cfield
09th Sep 2020 09:05

Why do you think one party would make losses? I did say the husband has another property.

Thanks (0)
avatar
By Tax Dragon
09th Sep 2020 07:25

No.

Thanks (0)
avatar
By fawltybasil2575
09th Sep 2020 10:06

@cfield (OP).

The HMRC manual is correct.

In intending no offence, I believe that you appear to be incorrectly interpreting “income” (on Form 17) as GROSS Income (as opposed to NET Income).

May I respectfully suggest that, except where legislation states expressly or impliedly to the contrary, the word “income” always means “NET Income”. If one refers to basic legislation, eg S.1(2) ICTA 1988 or S.10 ITA 2007, one will see the word “income”, such word being, in the context of the remainder of that legislation in both cases, NET income.

By definition, therefore, Expenses will simply be deducted from (Gross) Income, to arrive at (Net) "Income".

Basil.

Thanks (0)
Replying to fawltybasil2575:
avatar
By Justin Bryant
09th Sep 2020 10:35

Agreed (subject to W&E etc. considerations). That was also confirmed in a recent ToAA case, where expenses reduced the s720 "income" charge.

Thanks (0)
Replying to fawltybasil2575:
Psycho
By Wilson Philips
09th Sep 2020 11:18

I'm not disagreeing, but when for example you look at the SATR it makes a clear distinction between property income and property expenses. If this specific point has not been tested in the courts I would say that it is at least debatable.

I would say that the wording in the legislation is less than helpful. For example, ITTOIA 2005 s270 is called "Income charged" and then subs1 immediately says that tax is charged on the profits arising in the year. Come on, draftsman, which is it - income or profits? Of course, the logical interpretation of that inconsistency is that income and profits are synonymous, leading to the reasonable conclusion that Form 17 is to be applied to profits and not to turnover.

Thanks (0)
Replying to Wilson Philips:
By cfield
09th Sep 2020 12:04

Yes I think it's a bit debatable too, especially if net income is not specifically defined and we're relying on context, generalisations and logical conclusions. Also, section 25 of ICTA 88 (Deductions from rent: general rules) refers to profits and gains, not net income, so I'm not 100% convinced they're the same thing.

By instinct, I never accept any tax rule as set in stone unless it is prescribed by legislation or decided by case law. That's why I'm querying this one.

I go back to my example of a mortgage in the sole name of one spouse. If the income is shared with the other spouse by DoT and F17, is the interest suddenly allowable to them both? I suggest not, so it does not follow that profits must be split in line with income. Even in a partnership, which most property letting is not, the partners can deduct their own expenses from profit shares.

Furthermore, we all know (or thought we knew) that a mortgage does not have to be secured on a particular property for the interest to be allowable. You don't even need to use the loan in the letting business. It is merely restricted to your capital account. The famous Rotterdam example in BIM45700 still confirms that, even though HMRC apparently now challenge it.

As Form 17 relates to a specific property, why should we blithely assume that the % income split applies to expenses too, when the mortgage may not even be on that property?

Thanks (0)
RLI
By lionofludesch
09th Sep 2020 10:50

I'd be very toey about a 99:1 split for income and a 50:50 split for expenses.

I agree with Basil. It's the profit that's being split.

Thanks (0)
avatar
By cathygrimmer
09th Sep 2020 11:46

I'd agree it's profits not income that's relevant. But if the husband is the 100% legal owner, a Form 17 isn't relevant.

Thanks (0)
Replying to cathygrimmer:
By cfield
09th Sep 2020 12:10

Yes, true, but in this case the property is in joint names. It's the other property that is 100% owned by the husband. That's why the expenses split is relevant. It would not be worth doing otherwise.

Thanks (0)
Replying to cfield:
avatar
By cathygrimmer
09th Sep 2020 13:18

My apologies - that will teach me to read more carefully!

Thanks (0)
avatar
By fawltybasil2575
09th Sep 2020 12:23

@ Wilson (your post at 11.18).

I must respectfully disagree that there is any “inconsistency” in the S.270 ITTOIA 2005 legislation to which you refer.

The heading (to that Section 270) of “Income charged” implies that thereunder (ie in the subsections) are the terms which determine the quantum of the “Income” which is to be “charged” to Income Tax. Subsection (1) simply states that such quantum IS in principle to be determined on the basis of the “profits” (impliedly that part of the income not covered by allowable expenses).

[The other subsections similarly explain other factors which correspondingly must be taken into account in determining the quantum of the “Income”, ie in conjunction with subsection (1)].

Whilst I would agree, in response to your opening paragraph, that the wording on SATRs is imprecise, and indeed arguably incorrect, such imprecision does not IMHO affect the legislation.

It would be a brave, and I would suggest rather unwise, representative who would seek (at Tribunal) to interpret “income” as gross income, in the circumstances envisaged by the OP.

Basil.

Thanks (0)
avatar
By unearned luck
09th Sep 2020 15:34

A very famous quotation:

"Income Tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else" Lord Macnaghten LCC v A-G 1901.

Later, Lord M said "The standard of assessment varies according to the nature of the source from which taxable income is derived… In every case the tax is a tax on income, whatever may be the standard by which the income is measured. It is a tax on ‘profits or gains’ in the case of duties chargeable under Schedule A.”

Thanks (0)
avatar
By unearned luck
09th Sep 2020 15:34

A very famous quotation:

"Income Tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else" Lord Macnaghten LCC v A-G 1901.

Later, Lord M said "The standard of assessment varies according to the nature of the source from which taxable income is derived… In every case the tax is a tax on income, whatever may be the standard by which the income is measured. It is a tax on ‘profits or gains’ in the case of duties chargeable under Schedule A.”

Thanks (0)
Share this content

Related posts