Workshop: Avoiding joint-ownership tax traps

The legal issues lawyers face when advising on jointly owned property (explored in my workshop article Solicitors Journal, 12 February 2013) often link to tax issues, with problems to avoid and benefits to add for clients prepared to pay for the advice. Ensuring your engagement letter is correct, making clear what you are (and, crucially, are not) advising on is essential.

Some crucial tax traps must be avoided, when taking clients' instructions, over stamp duty land tax (SDLT) as well as those below. Flagging up in writing potential future liabilities, offering help yourself or through a third party could save a later negligence claim over a tax bill.

Second homes

An increasing number of second properties, e.g. homes for a child at university or a dependant relative, or a holiday home, involve tax issues needing careful consideration. It is vital to consider the reasons for buying the property, who is going to live there, and - where not the sole residence of the ownersthe best use of Principal Private Residence (PPR) exemption.

Where any joint owner has another home (or a share of one), whether owned or rented, even abroad, and both are (or were) used as a residence, the new property acquisition gives them two years in which to elect which is treated as the principal residence. No election means it's a question of fact.

Couples who are married (or in a civil partnership) have only one PPR between them. There are many detailed planning points around this exemption, but do remember buying a new property sets the two-year period running again, opening up new tax planning potential.
Once made, an election can be changed, so that even if for the obvious main residence, this keeps open future planning options. This is legitimate planning, if you're not concerned with political considerations like MPs flipping their main residences.

IHT traps

Potential IHT traps might befall an innocent property transaction, looked at in isolation, if tax is not considered. If the property is bought with funds from one source, but put in the name of another, that's a gift for IHT. If a joint owner has a smaller share of equity than his contribution to costs, the difference is also a gift.

Consider the property's purpose, and who will live there - if not the person providing the funds, there is an issue. Beware clients thinking they can save tax: e.g. Anne and Bob instruct you to buy a house in the name of their son Jack, to whom they give the funds so that completion money comes in his name.
This could be a disaster for both CGT (no PPR) and IHT (reservation of benefit). If discovered after the event, Jack could do a declaration of trust, that he owns as trustee for a home for them both, and a restriction would be entered against the title. Remember IHT and CGT apply to beneficial interests, not just legal ones, so that declaration of trust (or any change of equity) would itself be a gift, with IHT consequences if Jack died within seven years and possibly CGT payable.

Income tax

Income and capital normally go together for tax purposes. If Anne and Bob own a property in 30:70 shares, Bob having 70 per cent of the income, it is presumed that married couples will have a 50:50 income split. To change this requires notice to HM Revenue & Customs in Form 17 within 60 days of the declaration of trust. This relatively new form catches out many who assume that a spouse owning 70 per cent is taxed on that income share, which beneficial if he's paying a lower income tax rate than his spouse.

Not giving notice means a new declaration of trust is needed, with a new form submitted within this strict time limit.