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Where Taxpayers and Advisers Meet
Spousal Income Tax Planning with Joint Property
16/01/2011, by Matthew Hutton MA, CTA (fellow), AIIT, TEP, Tax Articles - General
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Matthew Hutton, Presenter of the ‘Private Client Monthly Tax Update’ Webinars, highlights a potential mismatch between the legal and beneficial ownership of property.

Context

A posting on the Trusts Discussion Forum on 5 October by Gemma Carter of Bottrills produced a mass of postings, with that from Malcolm Finney of Pythagoras Training cutting to the chase as explained below.

The Issue

‘The client has a flat in his sole name which he will be renting out. As he is a higher rate taxpayer he wants half of the gross rental income to go to his wife (as she is a lower rate taxpayer), but does not intend to give her a beneficial interest in the property’.

The Solution

Malcolm Finney notes ‘If the property is held in joint names of husband and wife and in the absence of an election under ITA 2007 s 837, each spouse is treated for Income Tax purposes as beneficially entitled to the income in equal shares, i.e., 50/50 (ITA 2007 s 836).

There is no requirement for the wife to own any beneficial interest therein.

Thus, a simple transfer of the legal title into joint names should achieve the objective.’

That is, it is not necessary, as suggested by others, to transfer any beneficial interest in the property to the wife.

Confirmation

Happy confirmation was provided by Simon Northcott on 6 October: ‘I have done what Malcolm Finney suggests and it worked!’

(Trust Discussion Forum, postings on 5 and 6.10.10)

Further Observations

Generally, it is accepted this is an odd result, though it clearly follows from the legislation.  Indeed, it seems that the then Inland Revenue expressly said that this analysis would follow (and indeed that tax planning was possible) on the introduction of independent taxation of husbands and wives in 1990/91 – in leaflet IR150.

In particular, the suggestion raised on the TDF that it was necessary for this analysis to give the wife a minimum beneficial share is not the case, as noted by Malcolm Finney. Because there was no gift of a beneficial interest there is no bounty and therefore no deemed settlement. Half the rental would, in this situation, be paid to the wife for which she should account (net of any Income Tax) to her husband.

Would this sort of scenario look bad for the husband from when the couple divorce? One view thought yes, another no, on the basis that in such cases it was typically a matter of horse trading. The balance of distribution of the assets on divorce will of course depend on all the circumstances.  While, in a case such as was raised on the TDF, it might look rather mean for the husband not to want to give his wife a beneficial interest, this might be entirely justified where for example the wife had financial problems, including a source of unlimited liability.

As to the final TDF posting by Simon Northcott: ‘it worked!’, one doesn’t know what that means. Is it simply that no enquiry has yet been raised by HMRC on the tax analysis in the SA Return or (less probable) that the point has been specifically raised with HMRC and cleared by them?


About Hutton Webinars

Continual difficulties and hassles of travel to a lecture/conference venue and costs constraints have led to the increasing popularity of the Webinar as a forum for delivering information in a cost-efficient and effective way. This is a facility which Matthew is now offering to his clients. All you need to attend is a PC or a Mac with Internet access.

Starting on Wednesday 19 January 2011, Matthew will be running a monthly 75-minute Private Client Tax Update webinar at lunchtime (1.00 - 2.15pm) to cover all that you need to know to advise your clients more effectively, in terms of Decided Cases, Legislative Changes, HMRC Practice and Tax Planning Tips and Traps. The attached flyer and registration form gives the prices and further details. Note that, for registrations received by Matthew before 1 January 2011, there is a 10% discount on all the prices.

For further information, see: Private Client Monthly Tax Update 2011 Webinars

For a registration form: Private Client Monthly Tax Update 2011 Webinars Registration Form

About The Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.
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