Spousal Profit Sharing

An asset (for example a buy-to-let) owned by a husband and wife will be taxed 50/50 on them, regardless of the proportion in which they actually own the asset – unless they tell HMRC otherwise. So, (unless they elect otherwise) profits from a house owned 90% by the husband and 10% by the wife will still be taxed as if they received 50% of the profits each.

The alternative would be for the couple to elect (write to HMRC) to have the asset taxed in the same proportions as their ownership – 90% on the husband and 10% on the wife in this example.

So which option is better? Well, if the husband in our example is a Higher Rate taxpayer and the wife is a Basic Rate taxpayer, it makes sense for them to allow the default position to continue and to be taxed 50/50 rather than the husband to be taxed (at 40%) on 90% of the profits. But, if the tables were turned and if the wife was the Higher Rate taxpayer, it would be beneficial for them to make an election to have the profits taxed 90% on the husband and just 10% on the wife.

But there’s a catch. Once this election (known as a ‘joint income election’) has been made, it can’t be withdrawn (as long as the actual ownership of the asset remains unchanged)! So, if the wife had been the Higher Rate taxpayer and they’d made the election (a good choice at the time) but then their incomes reversed, they’d regret, with hindsight, making that election.

Is there a way round this? Yes, there is. The solution is for them to change the actual ownership of the asset. Doing this would break the joint income election. Even a 1% change would do the trick. They could go and see a solicitor and get the asset’s ownership changed to (say) 89% to the husband and 11% to the wife. The election is now broken and they revert to the default position in which the profits are taxed on them equally on a 50/50 basis.

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