ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice. Change 125: Jointly held property and earned income: section 836 and Schedule 1 (section 189 of FA 2004)
This change concerns the earned income exception from the rule which allocates income arising on property held jointly by a married couple, or members of a civil partnership, who live together, equally between the individuals concerned.
The change is that the joint property rule is rewritten in direct terms without reference to earned income, and the earned income exception is replaced with one for all partnership income, which has broadly the same effect. It also makes a related change to the definition of “relevant UK earnings” in section 189 of FA 2004.
Section 282A(1) of ICTA provides a rule that income arising to married couples and civil partners from jointly held property is allocated equally (the 50:50 rule). The rule is subject to a number of exceptions, including section 282A(4)(a). That subsection excludes all earned income from the rule. Earned income is defined by section 833(4) to (6) of ICTA.
This joint property rule is the only place in the Income Tax Acts where the concept of earned income is used directly. This note considers each type of earned income in turn and sets out whether it can arise on jointly held property.
The first case dealt with in section 833(4) of ICTA is employment, pension and social security income and property income attached to an employment. Such income cannot arise jointly.
The second case in section 833(4) is income arising from a trade, profession or vocation. Clearly, such income can arise jointly, ie where the business is carried on in partnership. Such income is specifically excluded from the 50:50 rule by direct reference to partnerships – see Exception C. Because all income subject to the partnership rules in Part 9 of ITTOIA is excluded it is not necessary to reproduce the special rule in section 282A(4)(b) to ensure that the income of sleeping partners is also excluded.
Section 833(5) to (5E) of ICTA contains complex rules to determine whether income arising from patents and know-how is earned or unearned. Such income can arise jointly. The section does not reproduce any of these rules and all such income (unless it is partnership income) will as a result fall within the 50:50 rule.
So where income was previously classified as earned the 50:50 rule will apply in cases where it did not apply before. But, couples will have the option of electing for allocation to follow beneficial entitlement (provided their shares in the asset match their shares in the income), which gives couples an alternative basis on which to allocate income that may work to their advantage.
The other types of income to be considered are those that are treated as earned under specific provisions:
	Adjustment income within section 232 of ITTOIA. This income can arise jointly where it is partnership income. It is now excluded from the 50:50 rule through the exclusion for partnership income.
	Post-cessation receipts within section 256 of ITTOIA. The source of such receipts is considered to be the trade, profession or vocation, and that no longer exists. It follows that the income does not arise from jointly held property and so is not within section 282A of ICTA.
	Furnished holiday lettings businesses within Chapter 6 of Part 3 of ITTOIA. This is specifically excluded by Exception D.
	Sale of income derived from personal activities within section 775 of ICTA. This cannot arise jointly.
	Profits from a Lloyd’s underwriting business. Section 171 FA 1993 provides that all income arising to a member from a Lloyd’s underwriting business is treated as arising from a trade. This might include income from jointly held property, such as that held in an ancillary trust fund. Such income is treated as earned under section 180 FA 1993. In order to ensure that the 50:50 rule does not apply, section 180(1)(b) is amended by Schedule 1 to specifically disapply section 836.
In summary, the exclusion for income subject to the partnership rules corresponds closely to the exclusion in the source legislation for earned income. The only type of income that will become subject to the 50:50 rule is income from patents and know-how that was previously classified as earned under the rules in section 833(5) to (5E) of ICTA. And this should generally work to the taxpayers’ advantage.
The repeal of section 833(5) to (5E) of ICTA also requires a change to the definition of “relevant UK earnings” in section 189(2)(c) of FA 2004. In essence, patent income arising to an individual who devised an invention counts as relevant UK earnings, but this is subject to exceptions in section 833(5C) and (5E) of ICTA. The amendment made to section 189 by Schedule 1 to this Act does not incorporate those exceptions, so that a wider range of patent income now qualifies as “relevant UK earnings”. This works to the taxpayer’s advantage.