HMRC change mind on income shifting

HMRC's view used to be that interest earned on joint savings accounts by spouses must be taxed on a 50/50 basis. It has now quite clearly changed its view. Could this provide you and your spouse with an opportunity to reduce your joint tax bill?


Old fashioned values Until fairly recently, a wife's income for tax purpose was treated as if it was her husband's. In 1980 this antediluvian view was replaced with "independent taxation". Its rules atre straightforward if the income of each spouse arises in their own name solely.However, life becomes tricky where income arises from jointly owned assets such as a joint savings account.


Joint asset rules If you;re married, you know the line between what's yours and what's your spouse's can be hazy. HMRC know this and have rules to prevent couples from declaring income from jointly-owned assets in ways to produce the lowest tax bill for them.


TRAP Even if an asset is held in unequal shares by a married couple S.836 of the Income Taxes Act 1987 treats the income from it for tax purposes as if received equally. This may result in one spouse paying tax on income which isn't theirs. There are exceptions to this rule.


Tax planning election  Where the ownership of an asset is other than 50/50, a married couple can elect to be taxed on their actual share of the income it produces. The election must be made in the correct format on Form 17 (which can be downloaded here ) and submitted within a fairly tight deadline.


Form 17 procedure You can use a Form 17 to declare a beneficial interest if you hold property with your spouse jointly and you:

• own the property in unequal shares
• are entitled to the income arising in proportion to those shares
• want to be taxed on that basis.

A form 17 can’t be used to allocate income for tax purposes in respect of:

• partnership income
• rental income from letting of furnished holiday accommodation
• dividends from shares in a close company
• income which for tax purposes is treated as belonging to someone else even if it arises from property held in joint names
• property held as beneficial joint tenants where you are both entitled to the whole of the property and income.

Procedure and time limit Once completed a Form 17 must be sent to HMRC within 60 days of the date of declaration. This deadline will not be extended for any reason.

With the form send documents which show how the proportions of beneficial interest shown were arrived at. If the proportions change for any reason notify HMRC straightaway.

TRAP Until June 2011 HMRC claimed an election couldn't be made in respect of interest on a joint bank or savings account. Their view was that as the money in joint accounts is accessible by either spouse, the ownership was equal and the 50/50 split applies.


Rethink on ownership HMRC's 50/50 approach is out of step with general law which takes several factors into account in deciding who owns money in a joint account. A recent tribunal case confirmed that interest on a joint account can be attributable in unequal proportions.


Trust is important Where both spouse pay in and withdraw money from a joint account, it may be almost impossible to say how much of the balance each owns. It is equally impossible to say how much interest each is entitled to. There is a simple solution to this problem.


TaxTip If you want interest on  joint account to be taxed otherwise than on a 50/50 basis, draw up a simple trust signed by you and your wife indicating how the capital and thus the interest is owned. You can then make a form 17 election specifying how the interest is to be allocated for tax purposes.


Example statement of trust 

Bank account at ABC Bank Plc (number 01234568)

Mr John X (J) and Mrs Susan X (S) are the joint legal and beneficial owners of the above named account (the account) and, in accordance with the terms and conditions of the operation of the account as set out and varied from time to time by the bank, have equal and several rights over the money in it.

J and S both contribute money to and withdraw money from the account. While recognising this J and S agree that from the date of this agreement unless revoked the money held in the account at any time shall be beneficially owned as follows:

• J 20%
• S 80%

Interest

All interest paid or accrued in respect of money held in the account will be due to J and S in proportion to their respective beneficial ownership as determined by this agreement.

Signature……………………….. Name…………………… Date……………

Signature……………………….. Name…………………… Date……………


Throughout this article please construe references to couple(s), spouse(e) and marriage as including civil partnerships.