Property tax: Form 17 - Get the details right
In the first of a new series of articles on property tax Jennifer Adams looks at some of the nuances involved in completing a form 17 declaration of joint property and income.
Many married owners of jointly owned rented properties assume that so long as they declare the profit on one of their individual tax returns then that is their legal liability done.
But as one AccountingWEB member recently recounted in Any Answers, this is not necessarily correct, particularly if there is an uneven split of income and the taxpayers may need to complete a form 17. In response to this and numerous previous queries, this article covers the basic requirements of form 17 and considers the options it provides for efficient tax planning.
Types of ownership
There are two ways in which more than one person can own a property, either as:
1. Joint tenants - whereby each is deemed to own an equal share in the property. So three joint tenants will be entitled to a third share of any income or capital gains arising from the one property. When one owner dies the property is automatically transferred to the other joint tenants in equal shares and none can sell their share without the others’ permission. The legal rights of the surviving parties to a joint tenancy override a will even if the will explicitly leaves the deceased’s share to someone else. Whatever the proportions in which the parties have actually contributed to the purchase price, and/or to the maintenance of the property or mortgage, the legal presumption is that any proceeds of sale will be divided equally. To place a house in joint names is to make a gift of any excess contribution to the other party.
2. Tenants in common – where the share of each owner is separate, may be unequal and can be disposed of in lifetime or on death as the respective owner wishes.
Two or more unmarried people may own property either as joint tenants or tenants in common, although it is more usual to be held as tenants in common. The default position of property ownership by spouses/civil partners is as joint tenants.
A joint tenancy ownership can be changed into a tenancy in common ownership at a later date, but a tenancy in common cannot be changed into a joint tenancy.
With a property owned by unmarried parties, or held within a business partnership, the tax follows the beneficial ownership (which owner paid the greater deposit, took out the bigger loan for purchase etc) rather than legal ownership (the name on the legal documentation including the deeds).
This does not mean that the rental profit or loss must be allocated in the same proportion as the underlying beneficial ownership. Rather, the owners can agree a different split as they see fit, the proportion referring to profits and losses only and not necessarily to the capital received should the property be sold. Form 17 is irrelevant to unmarried owners of joint property however held.
Married owners – the point of form 17
By default, tax law (s836 ITA 2007) holds that rental profit from property jointly owned by spouses/civil partners is taxed 50:50 irrespective of the underlying respective proportion of actual ownership - although this does not apply to property held within a business partnership proper. Again it is a misconception that all that has to be done is to submit a form 17 to HMRC and the profit is taxed at a different split to the default 50:50.
If it would be more efficient for income tax purposes to split the profit differently, then the profit may be divided according to that beneficial ownership. Such unequal ownership is achieved only as tenants in common and it is then that a form 17 is relevant. Form 17 must be signed jointly - if one spouse/civil partner does not sign then both must accept the standard 50:50 default split. The form is also only appropriate between two married/civil partners living together.
Once HMRC has been notified the new proportions remain in force until the couple's beneficial interests in the property change, or one spouse/civil partner dies or they stop living together as a married couple/civil partners. The form must be submitted within 60 days of the date of the declaration and cannot be backdated, the time limit being strictly enforced with no power of extension.
The importance of a declaration of trust
The specified share of a property held as tenants in common is not shown on the title deeds of the property, so how much each individual owns and under what terms is recorded in a formal document known as a “declaration of trust”. The declaration of trust is then signed by all parties and recorded on the property register at the Land Registry. Evidence of the property being held jointly in unequal shares must be submitted to HMRC with the form 17. The strongest evidence is a declaration of trust which costs in the region of £300 to obtain from a solicitor.
- The proportion as per the form 17 submission continues for all later years and there is no limit on the number of times a form can be submitted. But the revised proportions can only be changed specific to the events given above. The smallest change of interest (point 4 above) cancels the declaration with the tax split automatically defaulting to the standard 50:50 unless a fresh declaration is made. Therefore the change need only be 1% in ownership in order to arrange a different tax split, which may be necessary depending upon the respective tax rates of the owners.
- It is suggested that whenever a married couple purchase a property together they do so as tenants in common and sign a declaration of trust. They can then submit a form 17 election even if it is wished for the 50:50 tax split to be used, the reason being that once the election is made it can be changed whenever required; without it, nothing can be done.
- Form 17 is not required where the property is a furnished holiday let.
Recent tax case
The submission of form 17 is essential in order to apply for an unequal split of profits as the recent case of Mr Deepak Koshal Mrs Minu Koshal v HMRC  UKFTT 410 (TC) confirmed.
In this case Mr and Mrs Koshal held a property portfolio in joint names. However the husband claimed that beneficial ownership of the property had been transferred to his wife, and so rental income was taxable on her alone. HMRC disagreed and raised an assessment on Mr Koshal, levying penalties at 20% of tax lost.
No form 17 election had been made and there was no evidence to show any transfer of beneficial ownership. The properties had been purchased jointly via loans from Mr Koshal with Mrs Koshal managing the property and collecting the rents. The tribunal ruled that the property income should be taxed 50:50.
Capital Gains position
Regardless of how the rental income is treated for income tax purposes it is the underlying beneficial ownership that determines the capital gains tax treatment. Therefore the allocation must ensure that the full CGT allowance can be used by each owner. This may not be the case for a married couple who had originally chosen a 90:10 split, therefore the declaration will need to be revised preferably a few months prior to the actual sale of the property which should give HMRC enough time to record the required changes.
A transfer of beneficial interest from one spouse to another is a CGT disposal. Although unlikely to trigger a gain by virtue of the 'no gain/ no loss' rules there may be consequences when the property is finally sold.