Taxation of rental income - received or entitled?

Trusts Discussion
1

We are dealing with the estate of an individual (T).

Prior to her death, T was receiving rental income from a property. The beneficial interest in the property property was owned

  • 25% by T absolutely
  • 25% by T’s brother absolutely
  • 50% by a discretionary trust of which T and her brother were potential beneficiaries.

T was receiving and paying tax on all the income from the property. (Not with a view to any particular tax advantage but the family affairs were disorganised). Her brother is the sole beneficiary of her estate in any case, as well as also being a potential beneficiary of the trust.

My understanding from ITTOIA 2007 s271 and the HMRC manual PIM1030 is that joint owners of a property can agree to share the rent in different proportions to the beneficial interest. (HMRC manual: ‘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.’)

However, I am unsure whether this applies where a share of the property is owned by a trust? Will it be acceptable in this scenario to treat the rent as (having been) taxable on T during her life on the basis that she received it? If not, what is the least painful way to now untangle the situation? I am grateful for any guidance.

2

If the allocation of income is the result of disorganisation then where is the agreement required by PIM1030?

In any event nowadays you would need to consider s 809AZA ITA 2007.

Who are the trustees of the DT and what do they have to say?

3

Thank you for the above.
The trustees of the DT were T and her brother and so they were aware of the arrangement and happy with it, unfortunately the potential tax complications were not considered.

4

I believe that you should account and therefore tax the rental income according to the beneficial ownership. as Duncan mentions, if there is no written agreement, then it would be prudent to stick with the beneficial ownership proportions.

Another point to bear in mind is that there are other potential beneficiaries of the DT, so you need to make sure that they are not deprived of future distributions from the trust.

When you prepare the estate accounts for T, I believe you will need to factor in the net amount that is due to the DT and then transfer that amount to the DT as part of the distribution of the estate.

In terms of income tax returns for T’s brother, the DT and T, it would probably be easier to explain the position to HMRC through correspondence and put forward some computations for correcting the tax position.