If a married couple (or civil partners) jointly own an asset then under the provisions of Income Tax Act 2007 the income from the asset is automatically assessed on them 50:50 for tax purposes. There are a number of exceptions but where the rule applies, the couple are liable to pay income tax on half the income, even if their beneficial interests in the property are unequal.
Often couples have different incomes and pay income tax at different rates, so being taxed in equal shares may not be particularly tax efficient or practical. If they would prefer any income to be assessed on them in line with their actual interests in the property, the couple must make an election to HM Revenue and Customs (HMRC).
How do I make an election?
The legislation allows a couple to declare their actual beneficial interests in the property, and any income arising from it. There are strict time limits for notifying the declaration to HMRC and a special form must be used. Provided this is dealt with correctly, HMRC will assess the couple for income tax on the basis of their actual underlying beneficial interests, rather than the 50:50 assumption, from the date of the declaration.
Once HMRC has been notified, this will continue to be the basis of the couple’s income tax assessment until there is any change in the individuals’ beneficial interests, either in the income or in the property itself (including if it is sold - the election will not carry forward to any replacement property or proceeds of sale), they divorce or permanently separate, or one of them dies. This is therefore both an opportunity for planning, if couples wish to make an election, and something to bear in mind when couples acquire property in unequal shares.
Beware if you are not married
There is also a point to watch for unmarried couples who own assets in unequal shares – while unmarried they will be assessed in line with their actual interests, but as soon as they get married the 50:50 rule will apply, unless and until they submit an election.