We all know that Form 17 and a Declaration of Trust overrides the default 50/50 rule for married couples with joint income, but what about the expenses? Do they have to follow the same % as the income, be split 50/50 or can the spouses split them any way they choose?
Let's say a married man owns 100% of a rental property. He and his wife then move house and let out their old home which is in joint names. He is a 40% taxpayer so they sign a DoT and Form 17 giving 99% to her. However, the mortgage is in joint names and is left unchanged. The lender should probably be informed but let's forget that legal nicety for a minute. They are jointly liable for the mortgage payments, so it would seem appropriate to split them 50/50, even if they are paid out of the rent. As you can still claim 25% of the interest for 2019/20, this has the effect of reducing their overall tax bill. Next year of course it won't make any difference, but in principle the same applies to other joint costs, like insurance and maintenance, so still worth splitting these 50/50 going forward.
The HMRC manual seems to suggest that profits should be split in line with Form 17, but Form 17 itself only refers to income, so it seems to me a husband and wife are at liberty to split joint costs any way they choose, just the same as unmarried couples.
Normally this would be inadvisable if just one property is involved and he only pays tax on 1% of the rent, but in this case the husband has another property 100% in his name, and as it is all one letting business, he can offset the costs from both properties.
If spouses are indeed at liberty to split the costs any way they choose, irrespective of Form 17, then presumably the husband could claim 100% of the costs and offset them against the rent from his other property. That might even be enough to avoid 40% tax altogether, not to mention Child Benefit tax.
This might seem a bit dodgy, but suppose the mortgage was solely in his name and the rent was split 99/1 in his wife's favour. Would HMRC allow the wife to claim any of the interest, given that she has no legal obligation to pay the mortgage? Presumably not, so it seems to me they can't insist on the husband only claiming 1% on a joint mortgage. They would be having it both ways otherwise, and we know the taxman never tries to do that.
Am I missing something here or could this be a perfectly valid tax planning strategy?
Replies (14)
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Hope that scenario does not apply.
Counter intuitive and would lead to irrational results.
One party makes losses, other has super profits.
Over to you Tax Dragon for your now once a day post
@cfield (OP).
The HMRC manual is correct.
In intending no offence, I believe that you appear to be incorrectly interpreting “income” (on Form 17) as GROSS Income (as opposed to NET Income).
May I respectfully suggest that, except where legislation states expressly or impliedly to the contrary, the word “income” always means “NET Income”. If one refers to basic legislation, eg S.1(2) ICTA 1988 or S.10 ITA 2007, one will see the word “income”, such word being, in the context of the remainder of that legislation in both cases, NET income.
By definition, therefore, Expenses will simply be deducted from (Gross) Income, to arrive at (Net) "Income".
Basil.
Agreed (subject to W&E etc. considerations). That was also confirmed in a recent ToAA case, where expenses reduced the s720 "income" charge.
I'm not disagreeing, but when for example you look at the SATR it makes a clear distinction between property income and property expenses. If this specific point has not been tested in the courts I would say that it is at least debatable.
I would say that the wording in the legislation is less than helpful. For example, ITTOIA 2005 s270 is called "Income charged" and then subs1 immediately says that tax is charged on the profits arising in the year. Come on, draftsman, which is it - income or profits? Of course, the logical interpretation of that inconsistency is that income and profits are synonymous, leading to the reasonable conclusion that Form 17 is to be applied to profits and not to turnover.
I'd be very toey about a 99:1 split for income and a 50:50 split for expenses.
I agree with Basil. It's the profit that's being split.
I'd agree it's profits not income that's relevant. But if the husband is the 100% legal owner, a Form 17 isn't relevant.
@ Wilson (your post at 11.18).
I must respectfully disagree that there is any “inconsistency” in the S.270 ITTOIA 2005 legislation to which you refer.
The heading (to that Section 270) of “Income charged” implies that thereunder (ie in the subsections) are the terms which determine the quantum of the “Income” which is to be “charged” to Income Tax. Subsection (1) simply states that such quantum IS in principle to be determined on the basis of the “profits” (impliedly that part of the income not covered by allowable expenses).
[The other subsections similarly explain other factors which correspondingly must be taken into account in determining the quantum of the “Income”, ie in conjunction with subsection (1)].
Whilst I would agree, in response to your opening paragraph, that the wording on SATRs is imprecise, and indeed arguably incorrect, such imprecision does not IMHO affect the legislation.
It would be a brave, and I would suggest rather unwise, representative who would seek (at Tribunal) to interpret “income” as gross income, in the circumstances envisaged by the OP.
Basil.
A very famous quotation:
"Income Tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else" Lord Macnaghten LCC v A-G 1901.
Later, Lord M said "The standard of assessment varies according to the nature of the source from which taxable income is derived… In every case the tax is a tax on income, whatever may be the standard by which the income is measured. It is a tax on ‘profits or gains’ in the case of duties chargeable under Schedule A.”
A very famous quotation:
"Income Tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else" Lord Macnaghten LCC v A-G 1901.
Later, Lord M said "The standard of assessment varies according to the nature of the source from which taxable income is derived… In every case the tax is a tax on income, whatever may be the standard by which the income is measured. It is a tax on ‘profits or gains’ in the case of duties chargeable under Schedule A.”