Furnished Holiday letting - jointly owned property

Furnished Holiday letting - property owned jointly by husband and wife

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We have just engaged a married couple as clients.

She is a 50 year old higher rate taxpayer - salary of around £70K and a very small rental income from a personally owned property.

He is a little older and has pension income and is a basic rate taxpayer - income C 25K - £30K

There is also a furnished holiday letting which is carried out from a property at the bottom of the garden.

The whole property - house and let property are all owned jointly (50/50) and indeed the let property is precluded from being sold separately.

The husband has prepared his own tax return for the past 2-3 years, since the FHL commenced and has always declared all of the income on his return - based on the fact that he carries out all of the work.

I have two concerns.  Firstly that as the property is owned jointly, it feels as though some element of income should be declared by the wife.  Not least to reflect the fact that she is allowing her husband the use of her share of the property.

Secondly from a CGT perspective, in the event of a sale of the whole property, a taxable gain would arise in respect of the proportion relating to the let property.  The husband's share of this gain would at present presumably qualify for BAPR so be taxed at 10%; while without any FHL income being declared the wife's share would presumably be taxable at 28%.  If she declared a share of the FHL income on her tax return, presumably this could lead to BAPR being available.

The suggestion therefore to allocate the FHL profit 80% to husband to reflect that he carries out all of the business activity, then the remainder to be allocated equally to recognise the joint property ownership.

Does this proposal appear reasonable in this situation?

Many thanks for your feedback.

 

Replies (8)

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DougScott
By Dougscott
14th Dec 2023 21:24

There is no doubt it is perfectly legitimate for the husband to run 100% of the FHL business. I cant comment on whether there is any merit in what you propose.

Thanks (1)
By plummy1
16th Dec 2023 05:36

There is total flexibility in allocating the profits from an FHL when it is owned by a married couple i.e. they can be allocated up to 100% to either partner depending on what is most tax efficient.

This being the case I don't believe that their CGT position on disposal will be treated differently i.e. they will be treated as jointly having run the FHL.

Thanks (1)
Replying to plummy1:
By JCresswellTax
18th Dec 2023 10:32

This is news to me. So completely unlike a regular rental property where the profits are split based on ownership.

Is this because it is a deemed trade?

Thanks (0)
Replying to plummy1:
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By stephenpotter
18th Dec 2023 10:40

Many thanks plummy1.
Could I just clarify that you believe that irrespective of the income that may have been declared/taxed, even if none has been, when it comes to a sale, the whole of the husband's share of the gain can still qualify for BAPR?

Thanks (0)
Replying to stephenpotter:
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By FactChecker
18th Dec 2023 11:08

".. from a CGT perspective, in the event of a sale of the whole property, a taxable gain would arise in respect of the proportion relating to the let property. The husband's share of this gain would at present presumably qualify for BAPR .."

1. Do you mean BADR?
If so, you need to check your presumptions (not saying they're wrong just that there are a lot of conditions with which to comply).

2. plummy1 said: "their CGT position on disposal will be .. treated as jointly having run the FHL"
So how have you translated that into "when it comes to a sale, the whole of the husband's share of the gain can still qualify for BAPR" - despite you stating that "the property is owned jointly"?

Thanks (2)
Replying to FactChecker:
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By stephenpotter
18th Dec 2023 11:25

Yes indeed, Business Asset Disposal Relief (BADR) - my error, no doubt the fact that I am discussing a property led to the P.

In so far as that is concerned, the question is rather hypothetical so I would check the position in the event of any proposed sale.

With regard to point 2, maybe I misunderstood, but it appeared plummy1 said that on disposal they would, from a CGT point of view, be treated as jointly running the FHL.

My question was therefore, does this mean both husband and wife would qualify for BADR, assuming conditions are met, even if the wife had never actually declared any income from the FHL?

Thanks (0)
Replying to stephenpotter:
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By FactChecker
18th Dec 2023 11:31

That'll teach me to criticise ... I missed the words 'share of the' in your ".. the whole of the husband's share of the gain"!

In my defence, the words 'the whole of' distracted me ... leading me to construe that you were talking about the whole of the gain (not just husband's part of it).

With regard to whether "both husband and wife would qualify for BADR" - I refer you to my previous point 1 (and suggest the research is worth doing *before* the decision to sell is made).

Thanks (3)