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BTL property solely in wife's name - can she split rental income with husband?

BTL property solely in wife's name - can she...

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I have a married couple with just the wife having a buy to let property in her name.

The PPR is their main home which is solely in husbands name.

The Buy to Let is solely in wife's name.

Two years have passed and no tax return was filed declaring the rental income. They now want to come clean.

Both are 20% taxpayers, so can I split rental income between them so wife does not hit the 40% tax bracket?. The husband did have an active role in meeting tenants dealing with enquiries etc. So I was planning on creating a partnership and splitting income.

Can this be done, even though legally he owns 0% of the property?

Replies (15)

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By BKD
20th Nov 2014 17:14

No

For spouses, the split of income must follow beneficial ownership.

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Replying to whiteways:
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By Mr_awol
21st Nov 2014 12:21

For spouses, jointly owned property must be split 50/50, unless an election is made to use actual beneficial ownership (slightly different viewpoint to BKDs comment)

Property in sole names is 100% due to the owner.

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Portia profile image
By Portia Nina Levin
20th Nov 2014 17:18

How do we know

That the husband does not have a beneficial interest? The OP simply refers to the property being "in the wife's name".

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By Stuart.thomson
20th Nov 2014 18:17

I think this is 100% the wife's income. The husbands needs a legal interest in order for a split. I suggest you propose changing ownership so that they both own as tenants in common as that will maximise flexibility going forward.

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By Stuart.thomson
20th Nov 2014 18:19

In response to Portia, I think "solely in the wife's name" is sufficient to assume the husband does not have an interest. If there was some sort of trust arrangement then I am sure the OP would have mentioned it.

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Replying to zebaa:
Portia profile image
By Portia Nina Levin
21st Nov 2014 10:11

Wait until the divorce

Stuart.thomson wrote:
In response to Portia, I think "solely in the wife's name" is sufficient to assume the husband does not have an interest. If there was some sort of trust arrangement then I am sure the OP would have mentioned it.

There does not necessarily even have to be anything written down for the husband to have a beneficial interest. If any joint money was used, the husband certainly does have a beneficial interest, which he would look to enforce in the event of divorce. See the FTT case of Bingham and the Court of Appeal divorce case of Prest.

As BKD says though OPs do also frequently omit material facts.

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By BKD
20th Nov 2014 19:52

Stuart

My (recent) experience tells me that one cannot rely on anything that the questioner doesn't tell us. Portia was quite right to raise the point. Alternatively, I should have listed the 101 assumptions made in giving my response.

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Stepurhan
By stepurhan
21st Nov 2014 11:03

Proof

The difficult part is going to be proving the husband's beneficial interest. Simply being involved in the running of the property is unlikely to be enough. Joint money could be an angle, as Portia has noted but it will depend on the facts and what evidence there is.

Given that this is already a late notification of taxable income, the chances of HMRC taking an interest in the detail is much higher than normal . Trying to retrospectively split the income, especially if it reduces the overall tax take and penalties arising, would just be asking for trouble.

Not necessarily an accounting matter, but why are the houses in sole names anyway? If the wife gave up rights to the buy to let (solely in her name) whilst still not having any rights in the PPR (solely in husband's name) would that put her in a worse position in the event of divorce? Sometimes more than tax needs to be considered when transferring ownership of valuable assets.

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By Justin Bryant
21st Nov 2014 12:37

I disagree
With most of the above comments, as long as the position was decided at the outset so that there are no s809AZA ITA 2007 issues, and that is for the client to tell you. For example, under an oral agreement one spouse could have a beneficial entitlement to the capital yet no beneficial entitlement to the income etc. and that can always be documented subsequently if necessary.

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Replying to sarah douglas:
Stepurhan
By stepurhan
21st Nov 2014 12:51

Proof?

Justin Bryant wrote:
For example, under an oral agreement one spouse could have a beneficial entitlement to the capital yet no beneficial entitlement to the income etc. and that can always be documented subsequently if necessary.
An oral agreement, documented after the fact and at a time when it is clear the agreement being in place has a direct effect on tax and penalties due on undeclared income. Just curious how you would go about defending this position if HMRC said they did not believe that there was any historical agreement. Do you really think a back-dated document would stand up legally if this was contested?
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Portia profile image
By Portia Nina Levin
21st Nov 2014 12:38

Income from property held in the sole name of one spouse

Is taxable on the spouses according to their beneficial interests, and 50:50 (and form 17) does not apply in that case.

There is potential here for reaching the OP's viewpoint. Not enough facts as ever though.

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By King_Maker
21st Nov 2014 14:21

My initial "thoughts" :

My initial "thoughts" :

1. Was the BTL ever the wife's PPR?

2. Unlikely to be a partnership under the Partnership Act 1890.

3. How will the husband obtain a deduction for any loan interest?

4. Any attempt to re-write history is a fraud.

 

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By partner55
21st Nov 2014 15:48

Can you change ownership?

If wife gives her husband 5 or 10% of capital of property ( which would have to be done legally), they would split income 50:50 for tax unless they made an election.

 

 

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Portia profile image
By Portia Nina Levin
21st Nov 2014 16:29

It seems that here a general misunderstanding

Over the difference between legal interests (whose name it is in) and beneficial interests (who actually owns it under common law), as well as when the 50:50 (/form 17) rule applies.

It only applies when the legal interest is in the spouse's joint names. If the legal interest is in the name of one spouse, and the beneficial interest is actually joint, the 50:50 (/form 17) rule does not apply. The spouses are just taxable on their beneficial interests in the income.

Now, who thinks the wife might have a beneficial interest in the PPR, held in the husband's sole name? Clue: I am going to say in a while!

Justin is correct that the husband and wife could have different interests in the capital and income, but one of them would have settled a right wholly to income on the other to the extent of the differential, and it is actually ITTOIA 2005, section 624 (rather than the transfer of income streams legislation) that would undo it.

I do not think that Justin is suggesting that any documents are backdated; simply that a document is drafted currently to confirm what has always been the understanding of the parties.

I would agree with stepurhan though that to do so would get HMRC excited in these circumstances and might be viewed sceptically by a tribunal, who will normally accept the uncontradicted oral/written testimony of a credible, honest witness as fact.

Let me also respond to King_Maker's points, just in case nobody else does:

1. The husband and wife can only have one PPR. If the property was ever occupied as their joint PPR, it lends weight to the husband having a beneficial interest, just as it is likely that the wife has a beneficial interest in the current PPR, held in the husband's sole name.

2. Agreed, but largely a moot point, I think.

3. If the wife has the legal interest and the husband only a beneficial interest, she acts as his trustee. Assuming that the husband does have a beneficial interest and she has not committed mortgage fraud, she raised the loan in that capacity.

4. Agreed, but you can document currently that that has always been, but has not yet been documented.

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By Justin Bryant
22nd Nov 2014 14:57

I doubt

Settlements legislation would be in point as there is unlikely to be any "bounty" as Husband is working on the property and in any event purchase funds could have come from a joint account etc. and also if agreement is to give the same capital & income share (as a gift) then it won't be in point.

If spouses are not involved then it's pretty clear that I am right per PIM1030.

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