Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

Readers' Forum - Joint investment

20 October 2005
Issue: 4030 / Categories:

My clients are a married couple living together in the main residence; the wife is taxable at basic and the husband at higher rates. In March 1995 the wife purchased an investment property and she has paid tax on the income.

My clients are a married couple living together in the main residence; the wife is taxable at basic and the husband at higher rates. In March 1995 the wife purchased an investment property and she has paid tax on the income.
Unfortunately, it has belatedly emerged that the property was registered in joint names on acquisition and the rents should have been split 50/50. The property was purchased exclusively from the wife's self-generated capital and was considered to be her own. Had I been aware that the property was jointly owned, a formal declaration could have been made that all of the income was to be regarded as that of the wife.
As a genuine 'error or mistake' situation, is there any possibility of a retrospective declaration being accepted and, if not, by making a voluntary disclosure, would HMRC be unlikely to impose a penalty on the husband?
HMRC will obviously want the appropriate tax and interest from the husband, but will the wife's excess tax be repaid? Might one be set against the other?
The current tax returns will be completed on the correct 50/50 basis (assuming a retrospective declaration is not accepted), but for the year to 5 April 2006 can I assume that the rents could be reported wholly as those of the wife after the declaration?
It is appreciated that a declaration would also have effect for capital gains purposes so that, even though the property remains registered in joint names, any future gain will be regarded as entirely that of the wife.
Query T16,698                                                — Latymer.

Reply by Cedovim:

The best course of action here would be for the file of the solicitor who carried out the purchase to be inspected, because it appears that the wife did not expect to be only a 50% beneficial owner of the property.
There used, at any rate, to be a presumption of equity that, while a gift in equity from husband to wife was to be presumed from the legal form used, the converse was not. It may well be, therefore, that the wife has retained 100% beneficial ownership of her investment.
The reason for registration in joint names may have been to enable the legal estate to pass to the husband automatically on the wife's death without having to pass through the hands of her executors at H M Land Registry (with attendant legal costs). While such a course of action would be unusual, it would not be illegal.
If the solicitor had misunderstood his instructions, it would, furthermore, be possible to apply to the court for the documentation to be rectified and the property registered in the sole name of the wife. In law, this would take effect retrospectively and be binding on HMRC.
Such proceedings are, however, expensive and by no means a formality. HMRC would, furthermore, have to be given the opportunity to be joined as a party to any such application. In practice, they do not take up such offers provided that the parties have undertaken to place the full facts before the court. Substantive evidence would, therefore, need to be placed before a High Court judge for there to be any chance of obtaining such an order.
A 'deed' of rectification would not so operate. It may, however, be possible to persuade HMRC to allow a Land Registry transfer to be used in place of an application to the court and to be treated as having retrospective effect for tax purposes, if the evidence upon which such an application could be made is available.          

Reply by Goldstone:

TA 1988, s 282A(2) comments on the equal share basis and that it does not apply 'to income to which neither the husband nor the wife is beneficially entitled'. Nevertheless, as the property is held in joint names then the s 282A rule splitting the income equally does apply and the only way around this is, as mentioned by Latymer, to make an election under s 282B. This needs to be done on HMRC's form 17 and then submitted to the tax office(s) concerned, within 60 days of the date of the election.
Therefore, in connection with the unfortunate error, the first contact with HMRC should be by telephone, asking to speak with a person of higher grade, in order to discuss the matter.
I have not known of anyone having been able to make a retrospective declaration and in fact the wording of the notes attached to form 17 start with 'from 6 April 1990 if you are living with your husband or wife, the general rule is that income from property held in your joint names is treated as if it belonged to the two of you in equal shares. Each of you is taxed on half the income. The rule applies even if you and your husband or wife own the property in unequal shares'. It then goes on to say that if the property is held in joint names, but is owned unequally with the beneficial interest being the same, then the declaration can be made.
The question of penalties on the husband depends on the actual circumstances and facts, but as mentioned this is unlikely.
Following the interest and additional tax on the husband, the wife's tax position for the years concerned will also be revised. The wife's subsequent overpayments may be arranged to be set off against her husband's liabilities, but this intention will need to be notified in writing to the tax office(s) concerned. It is also wise to receive confirmation that these instructions have been received and will be implemented.
Again, Latymer is correct in intending to implement the 50/50 basis for the 2005 tax returns and also for the 2006 returns up to the date of the declaration, followed by all of the rents then belonging to the wife.
The rule that spouses who are living together are treated as beneficially entitled to income arising from a particular asset in equal shares in the absence of a declaration to the contrary, is not extended to capital gains. And just because the Land Registry's records show joint ownership of the property, the factual evidence based on the wife having purchased the property out her own monies is important for capital gains purposes. HMRC's Capital Gains Tax Manual at CG22025 dealing with jointly held assets says, 'if no factual evidence is available to determine each spouse's beneficial interest in an asset, you should assess the spouse with legal title, or if they have joint legal title, assess each of them as a holder of a half interest in the asset'.

Editorial note.

One cannot but help wonder whether there might be an argument that the husband is holding the half share of the property in trust for his wife. Supposing that such a declaration of trust had been made when the property had been purchased, would that have been valid to show that the whole of the income is that of the wife. We think that the answer is yes, but this, of itself, does not solve the problem.
TA 1988, s 282A(2) states that s 282A(1) (income from jointly-held property is taxed as if received in equal shares) does not apply if neither the husband nor the wife is beneficially entitled. Presumably this would cover situations where they both held the property in their names as trustees. But s 292A(3) confirms that if it is only either the husband or the wife that is beneficially entitled to the exclusion of the other (as one might be able to argue in Latymer's case), then a declaration under s 282B is required if the income is not to be taxed in equal shares. It seems that it is the simple fact that the property is 'held in the names of a husband and wife', rather than the capacity in which they hold the property, that is important.

Issue: 4030 / Categories:
back to top icon