Neil MacGillivray: The tax quirks of jointly held investments between spouses

While tax planning is relatively easy where investments are held in an individual’s own name, on Valentine's Day Neil MacGillivray says great care is needed when it comes to jointly held investments between spouses...

Last month, I looked at how married couples and civil partners could consider transferring investments from one party to the other to maximise unused allowances and lower tax rates.

This article will give an overview of why careful tax planning is essential when spouses hold investments jointly.

HM Revenue & Customs (HMRC) generally treat jointly owned property by spouses (whether married or in civil partnerships) as being owned equally for income tax purposes except for:

  • Partnership income
  • Income from furnished holiday lettings
  • Dividends in respect of shares in a close company

Ownership of most joint investments such as life insurance bonds, shares, collectives and bank accounts are held as joint tenants. This is where each spouse/civil partner has an equal right to the property, and when one dies the ownership automatically passes to the survivor.

Jointly owned investments can also be held as tenants in common, where each individual’s share is held separately. The share does not need to be equal and the parties can dispose of their share separately. Even in this scenario where assets are held in different proportions, HMRC still treats income on a 50/50 basis for married couples or civil partners.

That said, where spouses own assets in different proportions as tenants in common, then they can make a declaration to HMRC to that effect. Thereafter, the couple will be taxed based on their actual share. The notice of a declaration, using Form 17, must be given to HMRC within 60 days of the date of the declaration.  It should be noted that HMRC require evidence of actual beneficial ownership to be submitted with Form 17.

The declaration continues to have effect until such time as the beneficial interests of the spouses in either the income or the property ceases to correspond with the declaration. This can lead to an administrative burden if, say, the investments in a joint portfolio are changed on a regular basis as a fresh notice of declaration will be required each time.

It is possible where assets are held in joint tenancy to have this severed and replaced by a tenancy in common. This is done by way of a deed and legal advice will be required.

Equal shares

It is worth pointing out that regardless of how income is dealt with, in relation to capital gains tax and inheritance tax, it is the underlying beneficial ownership that determines the treatment for tax. Where there is no declaration regarding income, and the split of ownership is not clear, HMRC will normally accept that spouses hold the property in equal shares.

The golden rule, “that we need to consider the impact of any changes of ownership on all taxes”, must never be ignored. What is perhaps beneficial for income tax, may not be ideal for capital gains tax or inheritance tax.  It may, therefore, be important to consider where a declaration is in place for income, that the spouses’ shares may need to be revised for capital gains or inheritance tax planning purposes.

In most circumstances when dealing with wealthier clients, who are married or in civil partnerships, holding investments in their individual names for tax planning is perhaps the most straightforward and prudent option. Where they wish to hold investments jointly, then it is important that they are made aware of the limited flexibility; understand the tax implications of joint ownership and, if required, put the correct declarations in place.

Neil MacGillivray is head of technical support at James Hay