Mortgagor liable to tax on property income???

Mortgagor liable to tax on property income???

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The unmarried mother of my child lives in house which has a first mortgage from a bank on which interest is payable. I have given a second mortgage, under a court order, for nearly 70 per cent of the value of the property. There is no interest payable on this mortgage and it is described as a legal mortgage, but the specified sum is defined as a percentage of the value of the property.

The mother wishes to relocate to a different area for a period of two-years to undertake a course of further education. During this time she wishes to rent out the property. I am not against this option, but am concerned that the Inland Revenue may deem the income to be my income given that I have a non-interest bearing charge that is over 70 per cent of the value of the property. The building society has a charge which is another 15 per cent and the mother has equity of another 15 per cent.

Could anyone advise me as to the likelihood of the revenue assessing the income to my account? If I am likely to be assessed I want to make arrangements for the appropriate amount of money to be set aside and not paid to the mother who wishes to use the income to rent accommodation closer to the centre of her proposed course of education.

If I approached the Revenue with a copy of the agreement would they be able to advise me?

Allan Duff

Replies (3)

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By AnonymousUser
17th Sep 2004 14:05

Don't know - sorry
Allan
I think you'd have to run that past a solicitor or insolvency practitioner. Any debt due to the Revenue re tax on rental income would be preferential if a trustee in bankruptcy were to be appointed. However, the mortgage is a first charge on the property and I would have thought the Revenue could not realise this without discharging the debt. It would be a bit drastic though if that were to happen as they'll try to collect the debt otherwise before resorting to bankruptcy proceedings. Also there would probably have to be sufficient equity in the property to pay the trustee's fees and the preferential debts, I would have thought, before the trustee would seek a possession order. Personal bankruptcy is very bad news and anyone in that position is well advised to seek every other possible avenue before resorting to it. Although in theory the trustee acts on your behalf this will usually be an insolvency practitioner and of course they are in business to make money and are mainly interested in securing their fees (I'm not having a go at them - that's just the way it works). The trustee is therefore not really interested for example in ensuring that any assessmemts raised are correct. Basically, you get skinned. So although this possibility seems remote I'd certainly try to talk the mother out of allowing this to happen.

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By AnonymousUser
17th Sep 2004 09:29

No and thrice no
I think you are the mortgagee (not mortgagor) actually and as such I don't think you have an interest in the property and so are not entitled to the rent. If I let my house the Northern Rock may want to put the interest up but are not entitled to any of the rent. The principle amount of a debt may vary as I understand it, though I find it odd personally. The mother of your child obviously has to deal with the property in a certain way and if it were disposed of pay 70% of the proceeds to you. Possibly this creates a bare or constructive trust. I'm not a lawyer so I can't say what the precise legal position is but I see nothing in the arrangement which entitles you to rent. In any case s21 ICTA 1988 says that Schedule A income is assessable on the person receiving or entitled to the income. This was a subsidiary issue in a recent Special Commissioners' decision, King v Kings. The SpC decided that the legislation expressed no order of preference so assuming the mother receives all the rent she is the one who is assessable. The Revenue had argued that where property is jointly owned the owners were assessable in proportion to their respective interests in the property, unless one of them had relinquished their entitlement in writing. In summary therefore: a) I don't think you are entitled to rent, but you could check with a solicitor, b) if the mother receives the rent she is the only one assessable per s21 and c) if you wanted to put the matter completely beyond doubt you could use the Revenue's own argument by drawing up a piece of paper saying that you relinquish any entitlement to rent and that the mother is entitled to it, which you both would sign. That would be the 'belt and braces' approach and is probably unnecessary.

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By allan119
17th Sep 2004 11:52

thanks
Thanks advice Ken-yes I am the mortgagee as you say.

If the mother is liable as you suggest and doesn't pay the tax due or file a return etc. will I be liable in any way for her debts or would the revenue have a claim on the house /her assets for their money which would rank before mine?

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