Rental Income Taken Solely by One of Two Tenants in Common

Trusts Discussion
1

I have recently been instructed by a client who owns a property in the UK as tenants in common with his son, in equal shares. The property is let out and my client advised me that there is an agreement between he and his son by which my client is entitled to all the net rental income. My client declares the income for UK Income Tax purposes, but his son makes no Income Tax Return.

Although the property is in the UK, both my client and his son are domiciled in France.

Am I correct that HMRC will raise no issue about my client receiving all the rental income and declaring it for Income Tax purposes and his son declaring nothing, disregarding the division of the beneficial ownership?

Hazel Jones

2

I suggest that you look at HMRC’s property income manual PIM1030. You will note that this states:
Jointly owned property - no partnership
Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.
If queried, I would expect HMRC to expect the taxpayers to provide evidence that the beneficial interests in the property are unequal, for example a declaration or deed.

Carlton Collister
landtax llp

3

There was a readers question to Taxation in 2011 on this point. The Q&As can be found at https://www.taxation.co.uk/Articles/2011/04/13/23271/rent-division

Mark Woolley
Price Bailey LLP

4

Ah, but you can only read the answer if you subscribe to Taxation

Julian Cohen, Solicitor

5

You do not explicitly state whether your clients are resident in the UK or not; whether the son is aged 18 and over or not; and whether both are on the legal title or not.

Assuming the son is aged 18 or over (hence settlement provisions not in point) the two parties can in principle agree any split they choose with respect to the rental income and associated expenses. Thus, the split does not need to reflect the respective beneficial interests in the property.

However, with respect to any tax deductible expenses the test of “wholly and exclusively” must still be satisfied. Thus, for example, if the legal title is held in the name of, say, father only then any interest deduction on any mortgage in the name of father only will be denied to the son.

The father, presumably for no consideration (or perhaps inadequate consideration ie relief from discharging his share of the expenses), has agreed to the son receiving all the rental income and making a profit. Presumably, the father is for IHT purposes making a gift of the profit element to which he would otherwise be entitled?

Whilst not having seen HMRC apply ITA 2007 s809AZA to such an arrangement (broadly, a transfer of an income stream) it perhaps should be noted.

Malcolm Finney

6

I believe Mark’s reference is to the following extract:

13 April 2011
Rent division

Since moving in together, an unmarried couple have let out one of their properties. They have also recently purchased a jointly-owned property for letting
Mr A and Miss B have been living together as a couple for several years, but remain unmarried. They live together in a property owned by Mr A and, since she moved in with him, Miss B’s former private residence is now rented out.

The couple have recently purchased another property in their joint names and also intend to rent this out. Their long-term plan seems to be to build up a property portfolio to supplement their pension income in retirement.

Mr A is in full-time employment and pays tax at the higher rate of 50%, while Miss B is a basic-rate taxpayer who works on a part-time basis. She has time to administer the lettings and deal with any problems that arise.

My question is, even though this property (and presumably any future ones) is held in joint names, can the whole of the income be allocated to her? If this is not possible, could she draw a salary or self-employed earnings from the partnership rental income to reflect the work that she is putting in?

This would then reduce Mr A’s income chargeable at higher rates of tax. Any hints or tips on structuring joint property rentals when the parties are not married would be welcome.

Query 17,779 – Smith

Reply from Terry ‘Lacuna’ Jordan, BKLTax

As is now generally well known, married couples can own property between them in unequal beneficial shares and have the income taxed in equal shares under the provisions of ITA 2007, s 836 [1] in the absence of a joint declaration under s 837 [2] (often referred to as ‘nominal joint ownership’).

However, these provisions would not apply to Mr A and Miss B unless and until they were married. We are told that Mr A pays the highest rate of income tax and Miss B the basic rate; accordingly it makes sense for as much as possible of the property income to be taxed as Miss B’s. Receipt by Miss B of a salary would have National Insurance implications.

There is another, perhaps less well-known, possibility that might achieve the desired income split more straightforwardly. As explained by Richard Curtis in ‘Pieces of property pie [3]’ it is possible for an unequal division of property income between non-spouse co-owners to be agreed.

HMRC’s instructions on ‘jointly owned property – no partnership’ in the Property Income Manual at PIM 1030 [4] states:

‘Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.’

Accordingly, Mr A and Miss B can simply agree that all of the income from the jointly-owned properties belongs to Miss B.

As they are not actually married, Mr A and Miss B can each have an only or main private residence for capital gains tax purposes. Any gain arising on the disposal of Miss B’s former residence should benefit from exemption for the last three years of her ownership as well as lettings relief.

As the newly acquired property has not yet been let Miss B might occupy it for a short period as a residence so that it might in future benefit from exemption for the last three years of ownership and lettings relief.

As always when more than one property is available, an election under TCGA 1992, s 222(5) [5]should be considered.

The couple will also need to give careful thought to inheritance tax planning since the spouse exemption will not be available.

It might be that the assets of the first to die should be left on discretionary trusts for a class of beneficiaries including the survivor so that those assets do not increase the survivor’s inheritance tax ‘estate’.

Malcolm Finney

7

Malcolm is correct, but a further reply, as justification for an unequal split also referred to S271 ITTOIA 2005 which states “The person liable to any tax under this Chapter (Property Income) is the person receiving or entitled to the profit”

Mark Woolley
Price Bailey Private Client