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Flat in brother's ownership but I manage and collect rent. Can I declare the income on my return?

Flat in brother's ownership but I manage and...

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I manage and let out a property that is in my brother's name. Can I declare the income on my return rather than my brother showing it in his?  It would reflect the reality if I did declare the income on my return.

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By johngroganjga
24th Oct 2013 11:19

How does recording someone else's income on your return as if it was yours reflect reality?

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By andy.partridge
24th Oct 2013 11:26

Reality

Isn't the reality that your brother's asset is generating the income? His income, his tax return. Perhaps he could pay you a fee as a managing agent?

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By Old Greying Accountant
24th Oct 2013 11:57

The reality ...

... is the names of the parties on the letting agreement (if there is one). If you are getting the benefit of the rent, the ownership of the assets is not the deciding factor surely. Effectively you are letting the property rent free from your brother and sub-letting it, that is the implication from the question as I read it anyway?

If you are collecting the rent and paying it over to your brother that is a different matter and would agree with the previous posts.

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Replying to nick farrow:
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By andy.partridge
24th Oct 2013 12:20

Sixth sense

Old Greying Accountant wrote:
 Effectively you are letting the property rent free from your brother and sub-letting it, that is the implication from the question as I read it anyway?

You are way ahead of me, OGA. I didn't see that in the question. Basically, more information required from the OP regarding his meaning of the reality of the situation. I had assumed that the OP felt it was his money because he was doing all the 'work'. Doesn't he say the property is let out in his brother's name?
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By Old Greying Accountant
24th Oct 2013 12:33

I read ...

I manage and let out (get the rent from) a property that is in my brother's name (owned by my brother).

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By johngroganjga
24th Oct 2013 14:47

I don't think "let out"

I don't think "let out" necessarily means "get the rent from" (but of course it might).

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By King_Maker
24th Oct 2013 15:32

Possibly - with your brother's agreement and the proper paperwork.

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By carnmores
24th Oct 2013 17:51

who said less is more

??

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By Old Greying Accountant
25th Oct 2013 12:45

That would be ...

... Robert Browning!

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By b_udayshankar
25th Oct 2013 16:18

Flat in my brother's name

Thanks all for your posts. My error entirely that I did not make things clear. I "sold" the flat to my brother in 1994 when I needed to buy a house but the flat was below water. My brother then lived in the flat rent-free for two years but it was always understood that I was responsible for the flat and I continued to pay the mortgage till I paid it off entirely.  My brother did not own a property then and for some years after that.

I then let the flat out and managed it, keeping the rental income for myself - my brother did not ever receive any of the rental income.  The question is can i declare the income on my return in these circumstances?

Apologies for the lack of clarity.

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By Democratus
25th Oct 2013 16:39

You haven't made anything clearer...
I "sold" the flat to my brother in 1994

What does that mean - did your brother lend you money in return for living rent free? Did you actually sell it?

 I continued to pay the mortgage.

Are you saying you settled your brother's liability for the mortgage? 

My brother did not own a property then and for some years after that

This doesn't match with your earlier statement that you " "sold" the flat"

 

 

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By b_udayshankar
25th Oct 2013 17:08

Flat in my brother's name but utterly confused!
My brother got a mortgage in 1994 to buy the flat from me but the mortgage was used by me to pay for refurbishment of a new house that my wife and I bought;The Land Registry recorded the flat being sold to my brother in 1994;My brother did not pay me any rent for his use of the flat but (1) above meant we (my wife and I) paid the mortgage on the new loan against the flat from 1994 onwards till the mortgage was paid off in 2007;My brother "owned" the flat - he had not got a property at that point but then also bought his own house in 2008 or so;The flat has been let out by me for the past 10 months and the question I raised was to ask if I could declare this income on my return as I intend to transfer the flat to my ownership in the next two months.I will of course, account for the increase in value of the flat between my "sale" to him and my impending "purchase" of it from him at the current market value and pay my brother the CGT that will be due on the increased value;I intend using the letting relief amount of the lower of 40k, the PPR relief and the capital gain during the period he owned it.

 

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By Michael C Feltham
25th Oct 2013 18:43

quote:

 

My brother got a mortgage in 1994 to buy the flat from me but the mortgage was used by me to pay for refurbishment of a new house that my wife and I bought;The Land Registry recorded the flat being sold to my brother in 1994;"

The sale crystallized absolute ownership.

It is therefore your brother's property. Ergo, any monetary income accrues to you brother until he disposes of the asset.

What you used the proceeds of the mortgage for is another matter entirely.

Quote: "My brother "owned" the flat - he had not got a property at that point".

Oh yes he had! The flat.

In order to make this work as you hope, I suggest you ought to have taken the following steps:

Agreed a written lease between you and your brother whereby he rented you the flat for a peppercorn rent (Say £1/annum) and you then let it out on rental and then accounted under self-assessment property section for the rent stream, accordingly.

That's the form SA 105.

Now that's the Income Tax bit out of the way!

Now you have a CGT problem!

Your brother should have notified HMRC of his Principal Private Property (PPR) election.

If so, then up to the point of sale of the property he will suffer no CGT.

The only CGT due would be on any gain between the point where he purchased his house (2008 ish) and the point of sale of the flat.

If he had made the three year election at the time he purchased his house, then he would escape any charge to CGT; but, could accrue a gain then on his house up until the point of disposal of the flat. However once the flat is sold, he should then ensure he elects his current house as his PPR

And after a few years of residence this should evaporate.

I think that's about right! Long week and tired now!

 

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David Winch
By David Winch
28th Oct 2013 12:40

Tying yourself in knots

Unfortunately it is not so unusual to find people tying themselves in knots over property ownership.

I am normally dealing with criminal cases and, in a criminal case, it might well be alleged that the 'sale' to the brother in 1994 was entirely bogus (because, in effect, the OP continued to be the true beneficial owner of the property) and was part of a carefully planned and executed mortgage fraud.  The point being that the bogus 'sale' created an opportunity for an equally bogus mortgage application by the brother who made the 'purchase'.

So, in terms of the legislation in 1994, it could be regarded as a conspiracy by the brothers to obtain a money transfer by deception contrary to the common-law (conspiracy to defraud) and s15A Theft Act 1968.  (These days it would more likely be treated as an offence under the Fraud Act 2006.)

Things would have got a lot more complicated if either brother had been claiming or receiving benefits, such as Income Support or Housing Benefit, because the true assets of each brother are unclear.

We now have the position that the OP is expecting his brother to transfer the flat back to him but only expects to pay him by reimbursing any CGT the brother incurs on the (supposed) sale back at current open market price.

These things can be a nightmare!

David

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By martin barron
28th Oct 2013 13:07

Property income is treated as investment income and in this case the rents should appear on the tax return of the owner. However, if you are acting as his rent-collector it would be reasonable to pay you a fee for management which would reduce his income; but you would have to declare the fee on your tax return.M Barron FCA

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Replying to lionofludesch:
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By lisler
28th Oct 2013 22:13

What am I missing?

If I hire a lorry and receive an income from transporting goods am I taxed on the income or is the owner of the lorry taxed on the income?      Surely the person who receives the income is the person who is liable for the tax. Does it make any difference if the income producing asset is land and buildings?

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By yardleystar
28th Oct 2013 13:36

beneficial ownership

There's a lot of smokescreen here - I always thought tax followed ownership of an asset and if the brother is the beneficial owner regardless of any personal arrangements the tax stays with him.

The key question that would decide this is if the flat was sold, who would pay the cgt?

Whoever that is is the owner and should declare the rental profits

 

 

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Replying to DJKL:
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By Michael C Feltham
28th Oct 2013 14:09

@yardleystar

"The key question that would decide this is if the flat was sold, who would pay the cgt?"

The beneficial owner: his registered ownership: his CGT liability to account for and suffer CGT arising on his gain.

Whatever private arrangements are extant between the owner and his sibling are between them: nothing prevents a gift of money.

Unless such is perceived by the Revenue as a synthetic mechanism to avoid any taxes arising.

 

 

 

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By arnold28
28th Oct 2013 15:47

The lower of

"I intend using the letting relief amount of the lower of 40k, the PPR relief and the capital gain during the period he owned it."

I think I am missing something here. How does this relief work?

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Replying to cfield:
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By thehaggis
28th Oct 2013 17:13

The Lower of..

arnold28 wrote:

How does this relief work?

Exactly as stated. The lower of:

40k,the PPR reliefthe capital gain during the period he owned it.

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By Justin Bryant
29th Oct 2013 11:12

Get legal advice

This is something a lawyer should probably advise on (tax treatment follows legal analysis) and the links below may be helpful.

http://www.bailii.org/uk/cases/UKFTT/TC/2013/TC02806.html 

http://www.hmrc.gov.uk/manuals/cgmanual/cg65421.htm 

 

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Replying to kevinringer:
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By lisler
29th Oct 2013 22:51

Different issue

The case you've cited and indeed the extract from HMRC's manuals relate to the ownership proportion of jointly owned properties. The question presented in the opening post does not concern a  property jointly owned by a married couple.        On the facts presented the income was not received by the legal owner so I do not see how or why he is liable to be taxed on income which he did not receive. The recipient of the income is surely the person on whom the tax burden should fall.   Does clause 271  ITTOIA 2005 Person liable  "The person liable for any tax charged under this Chapter is the person receiving or entitled to the profits." apply, or not?

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Stepurhan
By stepurhan
30th Oct 2013 08:38

But who is entitled?

@lisler

The question that everyone is trying to resolve is who is entitled to the rental income. The fact that the OP is keeping the rent does not mean he is legally entitled to it.

To take your truck hire example, the owner of the truck is entitled to the rental income from their asset, the truck. You are then entitled to the income made from your use of the truck. In a similar fashion, the OP could be renting from his brother (the legal owner) and then make use of the flat by subletting to someone else. But without the brother granting the right to use of the flat, that right to income from subletting does not arise. The beneficial ownership arguments, which would make the OP the person entitled to the income from what would then be considered their property, are a potential way around this.

To put the complications of this particular example out of the way, what if I let a property through a managing agent. This agent keeps the money in a client account and only passes it on to me when I ask for it. Does the fact I have not "received" the rental income mean I'm not taxed on it? Does the fact that the agent has received the rental income mean he is?

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Replying to mr. mischief:
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By lisler
30th Oct 2013 09:28

Your trying to overcomplicate the issue

From the facts outlined in the opening question it is quite clear that the brother in whose name the title to the property is registered does not receive the income nor does he think he is entitled to it, nor does he think he should receive it.

In the case of a property let through a letting agent quite clearly the contractual arrangement is that the property owner is entitled to the rent. Even if the agent does not pass the rent to the owner the owner is still liable for the tax on the income. Albeit he may have a bad debt he can use to offset against his property business income.

The legislation makes it very clear that "the person liable for any tax charged under this Chapter is the person receiving or entitled to ...  Note the first person mentioned is the "person receiving". I would contend that it is only if he is not liable then the person entitled would become liable for the tax.

 

In the scenario outlined in the original question I cannot see why so many of you are arguing that the person in whose name the property is registered is in any way liable for any tax on the rental income. When he does not receive the income nor is he entitled to it. The lorry analogy I made earlier still stands. Modify it slightly to "I own a lorry and let X use it without charging him for its use". I own the lorry but I do not receive any income from it nor am I entitled to any income for it. Am I still liable for any income the asset generates? I think not.

Have any of you seen recent comments on various property portals about "rent to let". These are situations where someone rents a property from the landlord and then sub lets. Is the legal owner liable for the income from the sub lettings, whether or not formal documentation of the arrangement exists?

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By Justin Bryant
30th Oct 2013 10:12

lisler

The case below may be of interest and there is a similar discussion in the other link below:

http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC01206.html

https://www.accountingweb.co.uk/anyanswers/question/mother-son-let-unequal-share  

 

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Stepurhan
By stepurhan
30th Oct 2013 10:17

Oversimplifying

Whilst I can see your argument, I think you are actually oversimplifying rather than everyone else overcomplicating.

Your rent to let point was actually, in fact, covered in my last post. If he was renting the flat then, subject to restrictions on the lease, he would be entitled to income from subletting. The point is that it is the renting from the actual owner that makes subletting possible. The owner receives a rent from the property. The subletter receives rent from their licence to occupy the property, not the property itself.

Your truck analogy is also flawed. Someone allowing their lorry to be used for free is still entitled to income from renting it out, they are just choosing to forego that income when letting X use it. Again, the income generated by X arises from whatever activity they undertake using the truck they have hired (albeit for nothing) not from the truck itself.

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Replying to Tax Dragon:
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By lisler
30th Oct 2013 19:11

Flawed lorry analogy

Ok, try this. I own a lorry, I let my brother have it to use as he sees fit. He hires it out to a third party. He receives the hire income and keeps it. I do not expect to receive any part of the hire fee.      Who should be taxed on the hire income, me the owner, or my brother the person who receives the income. I would contend that it is my brother who is liable for any tax on the profit from the hire income regardless of the fact that he is not the legal owner.

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By King_Maker
30th Oct 2013 11:01

IMHO, there is no definite answer in respect of the question of Receipt v. Entitlement. The Courts seem to accept both are possible - although, I think, Entitlement is currently slightly ahead....for the moment.

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David Winch
By David Winch
30th Oct 2013 12:56

@Basil

Basil

I agree.  (But I think you meant to say that no CGT will arise on the purported purchase - not sale - by the OP, from his brother.)

Realistically the mortgage fraud aspect is unlikely to become a problem in practice unless either the OP or his brother find themselves under investigation for some other criminality.

David

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By Justin Bryant
30th Oct 2013 20:06

S624 ITTOIA 2005 & s809AZA ITA 2007

What about the settlements legislation or transfer of income stream legislation potentially applying (as there is no outright gift of the lorry)?

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Stepurhan
By stepurhan
30th Oct 2013 20:51

Stretched analogy

@lisler

You seem determined to stretch the lorry analogy to even wilder contortions to prove your point. I strongly suspect that your brother charging to rent out your truck in this way is illegal from an insurance point of view if nothing else. That is even without considering how bizarre it would be allowing your business vehicle to be passed on to someone you don't even know and not even expecting something in return to cover the cost of normal wear and tear from them using it.

But rather than pursue this angle and have you come up with an even wilder stretch, let me try another analogy to illustrate how your insistence on "taxation follows the receipt" does not work. I use up all my basic rate band from my job, but I am entitled to £10,000 of dividend income on some shares I own. I arrange for that £10,000 to be paid into my wife's account instead. She is entirely free to use that money however she wishes and I pay all household bills from my income, so I am not expecting to receive any benefit from it. However, I still own the shares. My wife has no other income. Does changing the person receiving these dividends save the £2,250 tax bill I would have from the dividends falling in the higher rate band? If so, there is a wonderful tax planning opportunity.

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Replying to bernard michael:
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By lisler
31st Oct 2013 07:04

You seem to be stretching the point to extremes

To suggest that there is an insurance aspect over taxation is bizarre. I can obtain insurance on any vehicle that I am licensed to drive regardless of whether I am the owner or not. There is no wild contortion at all over my analogy. As for the wear and tear aspect I just think your trying to bring in a red herring. I submit taxation follows income. The person in receipt of that income is prima facie liable to pay tax on that income. That is what I interpret the legislation to say. Recent FTT decisions follow beneficlal ownership not legal ownership to tax the recipient of the income.

Your dividend example is concerned with a married couple, where different set of rules applies. There are tax planning opportunities in the example you have chosen. Quite simply all the husband need do is transfer some or all of his shares to his wife for them to benefit from her lower tax rate. 

When I get the time I'll explore some more FTT cases to see if there is more support for my contention than your simplistic view that legal ownership over rides substance over form.

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Stepurhan
By stepurhan
31st Oct 2013 08:23

Beneficial ownership arising

Why is my wear and tear point a red herring? I was simply pointing out how unusual it would be to allow someone you don't even know to subject your asset to wear and tear without expecting something to at least cover that. I can accept that you might waive such a thing with a familial relationship (the initial loan to the brother). Have you genuinely come across a situation where it extends beyond that?

Since you are citing beneficial over legal ownership, I would also be grateful if you could clarify how me lending someone an item gives them beneficial ownership. They have temporary use of the item but I would be surprised if you can cite any case that would confer ownership rights on them in that situation.

The husband COULD transfer shares to the wife, but in my example he hasn't. There may be many good reasons for this. The shares may be a controlling interest with the husband wishing to maintain the voting rights. The husband may wish to maintain control over the income source in case of future separation. Regardless of the reasons for not transferring the shares, in the example as given they have not been transferred. If the husband was in the habit of giving his wife £10k out of post tax income, the arrangement even leaves him personally better off, so no need to go down the "person forgoing income out of pure altruism" of your truck example. Given the husband retains ownership of the shares (legal and, with control of future dividends, I would argue beneficial) would he be taxed on the dividends "received" by his wife or not. If the £10,000 went to someone else, would that make a difference and, if so, why?

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