We must first make the general observation that HMRC Manuals represent HMRC’s view of the law. However we must remember that the Manuals are not the law, only HMRC’s guidance, but it is always helpful to consider HMRC’s views on a particular issue. If we look at Property Income Manual page PIM1030, the relevant extract states:
Jointly owned property: no partnership
Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.
The relevant legislation is s836 Income Tax Act (ITA) 2007 which deems, with several exceptions, income from property jointly owned by spouses or civil partners who are living together to be the equal income of those persons i.e. 50/50 each. This deeming rule is overridden if a declaration is made under s837 ITA 2007 (using HMRC Form 17).
The obvious issue here is that the property is not jointly owned, it is solely owned by the husband. By changing the beneficial ownership to ensure his wife has a 99% interest in the income and 1% interest in the capital, does this make the property “jointly owned”? As HMRC’s guidance stipulates that the Form 17 declaration overrides the joint ownership deeming rule, it appears HMRC’s view is that there must firstly be jointly owned property before the change of beneficial ownership brings s837 into play.
Even if a s837 declaration were accepted, the fact that the wife is to be given a 99% income share but only a 1% capital share is an arrangement that would be caught by the “settlement legislation” of s624 Income Tax Trading & Other Income Act (ITTOIA) 2005. The exception provided by s636 ITTOIA 2005 (exception for outright gifts between spouses or civil partners) would not apply here as the income and capital shares being gifted do not match. The result is that the husband would continue to be assessable on 99% of the income being his own 1% share and the 98% of income caught by s624 ITTOIA 2005. HMRC’s guidance on the settlement legislation is at TSEM4000.
The HMRC Manuals are primarily internal guidance for HMRC officers and so are not written with tax planning in mind. Therefore it would be naïve to take one page of guidance in isolation and assume that it covers all related issues.
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