Client Background

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A landlord owned 100% of a UK investment property and wanted to transfer a beneficial interest to his wife to reduce the household income tax bill on the rental profits.

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The challenge

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HMRC manuals can be helpful in understanding HMRC’s view, but they are guidance, not law. PIM1030 does include the statement (in summary) that, for jointly owned property where there is no partnership, profits and losses normally follow ownership, but joint owners can sometimes agree a different split and the tax position should follow the split actually agreed.

However, reading PIM1030 in isolation risks missing two critical overlays:

1. the statutory “50/50” rule for spouses/civil partners living together, and
2. the settlements legislation, which can tax income on the person who has effectively “settled” it, even where legal documents attempt to divert it.

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Our analysis

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1) Spousal joint property rules: default 50/50 unless Form 17 applies

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Where spouses/civil partners living together receive income from jointly held property, legislation generally deems the income split to be 50/50, regardless of underlying contributions, unless a valid declaration is made under the relevant rules (Form 17).

HMRC also summarises this framework in its Trusts/Settlements manuals (the “50/50 rule” overridden by a valid Form 17 declaration).

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Key point for this client: the property was not yet jointly owned — it was owned 100% by the husband. The planning proposal assumes you can create a “joint ownership” position purely by splitting income rights from capital rights. That is not what Form 17 is designed for.

Form 17 is intended to align income taxation with the actual beneficial ownership of the property, supported by evidence (typically a deed/declaration).

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2) Income/capital mismatch is a major red flag (and may not be a valid Form 17 position)

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A widely accepted practical principle (reflected in professional guidance) is that a Form 17 declaration is only valid where the spouses’ beneficial interests in the property and the income correspond — i.e., it is not meant to facilitate an arbitrary “income-heavy/capital-light” allocation.

So even if the couple attempted to create joint ownership, the proposed 99% income / 1% capital split would be vulnerable to challenge as not matching genuine beneficial ownership of the asset.

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3) Settlements legislation: likely to tax the husband on diverted income

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Even if documentation purported to give the wife 99% of rental income while the husband retained the bulk of the capital interest, that arrangement is highly exposed to the settlements legislation (income where the settlor retains an interest).

Crucially, the spousal exemption that can disapply settlements rules in straightforward outright gifts is not expected to protect a structure that is wholly or substantially a right to income or where the gift is not an outright gift of the underlying asset interest. HMRC’s settlements guidance illustrates that the exemption is aimed at genuine outright transfers rather than income diversion.

Net effect (risk summary): the husband could remain taxable on the “diverted” rental profits, undermining the entire planning objective.

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Our recommendation

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Rather than relying on an internet interpretation of PIM1030, we recommended an approach that is more robust and consistent with the statutory framework:

1. If the couple want an unequal split of rental profits, they should make a genuine transfer of beneficial ownership (e.g., tenants in common with an evidence-backed beneficial split), and
2. where appropriate, submit Form 17 with the required supporting evidence so the income is taxed in line with the actual beneficial interests.

We advised against the “99% income / 1% capital” structure due to its vulnerability under both the spousal property rules and the settlements legislation.

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Outcome

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The client opted not to proceed with the high-risk “income-only” arrangement. We instead helped them document a defensible beneficial ownership position and (where relevant) align the income tax reporting with the true beneficial interests using the correct HMRC process.

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Key takeaway

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HMRC manuals help explain HMRC’s view, but they do not override.

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Disclaimer: This case study is for general information only and does not constitute advice. Tax outcomes depend on full facts and the law in force at the time of disposal.