Revenue taxation from properties held jointly
When a property is held in joint names, it is important to keep in mind that the tax treatment of revenue is different for married couples (or those in a civil partnership) and for unmarried couples. For unmarried couples, revenue is taxed in the beneficial split, i.e. whatever they have agreed between themselves. Where a couple who are married or in a civil partnership however have a jointly owned property, income arising from that property is assessed on the basis of equal entitlement rather than actual ownership, ie on a 50:50 basis. It is possible to elect to have the income assessed in the ratio of beneficial (actual) ownership instead and this election is made on Form 17. The form can be downloaded here. The form must be submitted to HMRC within 60 days of being signed and must be accompanied by proof of ownership. The election cannot be backdated and is effective from the date on which the form is signed. It remains in force until the couple cease living together as a married couple/civil partners, or until the actual ownership changes. This election must be made to the tax offices dealing with both parties.
It's important to note that the above rules only apply to land and property held solely by the married couple/civil partners. If there is at least one additional owner, the equal entitlement assumed above does not apply. Where land and property is held in joint names with anyone other than a spouse or civil partner, the assessable amount will normally be the same as the share owned in the property being let. The owners can, however, choose to agree a different ratio if they so wish.
There is therefore some scope for tax planning if a married couple/civil partners have jointly owned rental property and are able to gift part of that property to a child/grandchild or other beneficiary. This is done through a bare trust. A bare trust is also sometimes referred to as a simple trust. Once a bare trust has been created, the beneficiaries cannot be changed and the beneficiaries have an absolute right to the income and capital from the trust. Any income or gains arising in the trust are assessed directly on the beneficiary and declared on their self-assessment return, i.e the trustees are transparent. The exception to this is where the beneficiary is a minor and the trust is created by a parent, in which case if the income exceeds £100 in a tax year, it is assessed on the parent. When an asset is gifted by way of a bare trust, if it is a chargeable asset the capital gains tax implications must be considered, as this is a chargeable transfer and the donor could have a capital gains tax liability. For inheritance tax purposes, this is a PET (potentially exempt transfer) and if the donor dies within seven years of making the gift, the beneficiary of the trust is liable for any inheritance tax due on the trust fund.
Although a formal trust deed is not essential for a bare trust, to protect all parties involved it is preferable to have a simple trust deed for completeness. It is recommended to use a solicitor to draw up the deed to ensure the wording and content is correct for current law and (assuming no advice is required) you should be able to find local solicitors who will deal with this for a relatively small charge (c. £150 plus VAT).
