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?