Jointly owned properties and tax on divorce and separation?

by Readers Question

4 months ago

Jointly owned properties and tax on divorce and separation?

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Jointly owned properties and tax on divorce and separation?

I was wondering if anyone could help me on a divorce and tax issue. My ex and I had four jointly owned properties, we were joint owners and there was no deed of trust altering the ownership from 50/50

I assume we should both pay are own tax on our own 50% of the rents, and have 50% of expenses each. Although the AST contracts were in my sole name and rents were paid into my sole bank account, clearly the money was divided indiscreetly, by way of our mortgage, bills and cash given to my ex.

We separated and I moved out of the family home to my own home in July 2015. There was a maintenance order in January 2016, where I carried on looking after the properties and received the rents and paid my ex a monthly lump sum and all the mortgage on the matrimonial home where she was still living. When the maintenance order was agreed, I assumed my ex would continue to pay her tax on the joint properties as nothing else was stated. We finally got divorced in July 2017, again when the consent order was agreed I assume my wife would continue to pay her tax on the jointly owned properties. I assume that during the tax year April 2015 to April 2016 my wife would pay her own tax on the jointly owned properties and again from April 2016 to April 2017 as there was no addition agreements put in place my ex would pay her tax on the jointly owned properties.

The tax inspector now claims that I am the beneficial receiver of the income from the jointly owned properties under ITA07 s836 exception F, The tax man requires me to pay all the income tax on the jointly owned properties. Yet I am still not the beneficial owner of the properties and CGT will be payable when the properties are transferred to me.

I understood that there was a need for a deed of trust to be in place to alter the tax percentages paid by each party and to alter the percentage ownership. The beneficial ownership and legal ownership should remain the same percentage.

Has anyone had the same query from the tax man and when did this exception F get introduced.


Editors Note:

Income from jointly held property

ITA07/s836(2) provides that where a married couple or civil partners are living together and income arises from property held in their joint names, both individuals are treated for income tax purposes as beneficially entitled to one-half of the income regardless of their actual respective beneficial entitlements, unless they make a joint declaration that it shall be otherwise under ITA07/s837. Refer to the Independent Taxation Manual IN115+ for further details.

This general ‘equal division’ rule at ITA07/s836(2) does not apply in some cases (referred to in ITA07/s836 as ‘exceptions’).

These are:

  • Exception A – any income to which neither of the individuals is beneficially entitled
  • Exception B – where the spouses/civil partners make a joint election to HMRC under the terms of ITA07/s837 that one of them is beneficially entitled to the income to the exclusion of the other or they are both entitled to the income in unequal shares
  • Exception C – partnership income
  • Exception D – income from a UK property business
  • Exception E – distributions from close companies
  • Exception F – where one of the persons is beneficially entitled to the income but it is treated as being the income of someone else under any other provision of the Taxes Acts

Broadly then, unless the individuals have made a declaration otherwise, foreign income arising from jointly held property will be regarded as belonging to each individual in an equal (that is usually a 50:50) share.

Any interest arising on the jointly held offshore bank account will be split equally between the account holders.

Of course married couples or civil partners may also hold assets separately; and they can divide up joint assets so that they hold them separately for the future. In these circumstances each spouse or civil partner is then taxed on the income from the assets each holds in his or her own name, in the same way as for ‘earned income’.


Neil Patterson

4 months ago

To assist I found the above relevant section in the HMRC manual >>

Exception F – where one of the persons is beneficially entitled to the income but it is treated as being the income of someone else under any other provision of the Taxes Acts

Mark Alexander

4 months ago

Hello Mike

Did you engage a solicitor to deal with your divorce? If so, what has he/she said about your predicament?

Whilst it is quite unusual, it is within the Courts powers to make amendments to consent orders. The scenario you have described seems to me to be a case for making an application to the Court to amend the consent order on the grounds of fairness.

Your solicitor should be able to advise further on this. If you do not have a solicitor I would recommend you to visit a few to get opinions. Most divorce solicitors offer an initial 30 minute consultation free of charge. Once you have done this you will be better placed to make a decision on the commercial viability of pursuing your case or just paying up.

I don't think you have a case against HMRC.

The above suggestions are offered in good faith and must not be construed as advice.

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