Often married couples will think that the costs associated with a Declaration of Trust are disproportionate to the benefits that they may bring in the form of being able to stream income to the lower rate income taxed charged spouse, and so they may declare the income in the manner they chose without putting in place the appropriate Declaration of Trust.
There has been a first tier tax tribunal case recently, which acts as a reminder as to why a Declaration of Trust should be used. The facts of the case were that a married couple alleged that there was an agreement between them to pay to the wife all, or substantially all of the rental income from jointly owned property. The tribunal held that this did not prevail over the operation of Section 836 of Income Tax Act 2007. Accordingly, given that the husband and wife jointly owned the property, the husband should properly be assessed to his percentage of the rental income on the basis of his 50/50 holding with his wife to income tax. In this case this led to a significant amount of back income tax being owed, together with interest and penalties.
If a couple hold property or income jointly, and wish to hold property and income on a basis other than a 50/50 basis, they have the option to make a declaration of their beneficial interest in a particular asset and to have the income arising assessed according to the relevant proportions in which they hold the property (Section 837 of the Income Tax Act 2007).
In the case of Koshal and Another v HMRC (2013) UK FTT410 (TC) there was no declaration showing unequal beneficial interest in the property and the couple’s arrangement was insufficient to rebut the presumption of 50/50 ownership. Where income redistribution is wanted, perhaps because one of the spouses is a top rate taxpayer and the other is not, then an appropriate mechanism to achieve this is a Declaration of Trust.