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Gift of rental income

Gift of rental income

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A question which has arisen from a prospective client.

His father gave him a flat approximately nine years ago which the son used as his main residence up till two years ago.  Subsequently this has been let out.  Previous advisers suggested that the son (who is a 45% taxpayer) enter into a deed of gift of the rental income to the that so that the father (a basic rate taxpayer) was assessed on the rental income.  Any thoughts as to whether this works?

Many thanks

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09th Sep 2014 13:30

Whos the legal owner the father still? If its the son surely own reason for doing it is tax avoidance which im sure hmrc will argue all day long

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By Carat
to Vile Nortin Naipaan
09th Sep 2014 13:53

Son is legal owner
 

Son is legal owner

 

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By lisler
to paul.benny
09th Sep 2014 22:06

Son is legal owner

Not as straightforward as that alone.

Quote from First Tier Tax Tribunal decision: 

"Under section 21(1) of the 1988 Act it states that "the tax shall be charged on and paid by the persons receiving or entitled to the payments. I interpret the wording that it can either be the person receiving or the person entitled to the payments that is charged to tax. The section does not specify that the persons entitled should be charged to tax before the persons receiving. Also there is no requirement in the statute for the person entitled to evidence in writing his surrender of that entitlement." 

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09th Sep 2014 13:49

Can you gift income?

Interesting concept.  Did the previous advisers provide any technical analysis?  Or a draft deed?

Would the son's ability to deal with the flat (eg sell it) be restricted?  Is this not just creating some kind of trust?

 

 

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09th Sep 2014 13:53

Not at all Duncan

The son can give his income away if he wishes. It is, after all, his income, so guess who gets taxed on it?

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By Carat
to ajspipers
09th Sep 2014 13:57

Portia - my thoughts entirely - simply son giving away his income that means he is still taxed on it.

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By Carat
09th Sep 2014 14:02

 

 

Would this alternative scenario work? Son grants a headlease to father at notional rent, and father then decides to let to third parties charging normal market rent.

Justification for this not being tax avoidance  would be that son has a young baby, is regularly away for long periods due to his work and cant act as landlord because of this.  Commercial reasons why he doesn't like using letting agents due to past experience of being shafted by one.

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By Kirkers
to Duggimon
09th Sep 2014 16:08

I doubt it

Carat wrote:

 

Would this alternative scenario work? Son grants a headlease to father at notional rent, and father then decides to let to third parties charging normal market rent.

Justification for this not being tax avoidance  would be that son has a young baby, is regularly away for long periods due to his work and cant act as landlord because of this.  Commercial reasons why he doesn't like using letting agents due to past experience of being shafted by one.

1. You don't have to use a letting agent. Therefore that's hardly a decent commercial reason. There are plenty of private landlords about!

2. You say he can't act as a landlord due to having a young baby (that's a rubbish reason) and is regularly away for long periods of time. There are lots of landlords who not only work in a separate location to their rental properties but some who live in separate countries. Again, its not a great reason.

 

The question I'd ask you is that if the son were a basic rate tax payer would there be all this fuss about him not being able to be a landlord? It's sounds quite simply that he doesn't want to pay HR tax on the profit.

HMRC will poke holes in your reasoning

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By Ruddles
09th Sep 2014 19:28

Kirkers

What specific legislation would prevent the above proposal? Or are you thinking of GAAR? (Because plenty of similar such arrangements were around when we had a £10k 0% CT band.)

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10th Sep 2014 08:45

Yes, section 271 ITTOIA 2005 carries forward the same taxation basis of "....receiving or entitled to the profits."

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10th Sep 2014 10:14

Yes but

If you surrender the entitlement, and transfer the right to receive the income, there is an income tax charge on the transferor on the market value of that right under ITA 2007, section 809AZB.

Absent such a transfer you are giving the income after you have received it, because it is not Dad's receipt, as he has no right to the receipt.

If you grant a lease back to Dad at less than market value, there is a CGT part disposal on the market value of the implicit lease premium.

What you can do is pay Dad for managing the properly, but what he is paid cannot be excessive, otherwise it will fail the wholly and exclusively rule.

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By lisler
to AIMCON
10th Sep 2014 11:27

Surely there is a way?

Portia Nina Levin wrote:

Absent such a transfer you are giving the income after you have received it, because it is not Dad's receipt, as he has no right to the receipt.

Would your reply be different if the tenancy agreement was in Dad's name and the tenant paid the rent directly to the father? The income would not have been received by the son at all and therefore there would be no need to consider the transfer of rights.

Secondly why not make the property business a partnership. As I understand it the profits of a partnership can be divided between the partners in any proportion they desire and varied year to year.

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10th Sep 2014 10:22

Complex

See 5.1.06 Taxation article by Richard Curtis Pieces of Property Pie. S809AZA ITA 2007 is the main problem here.

 

 

 

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10th Sep 2014 11:39

s809AZF(3) ITA 2007

Seems to block the p-ship route. I think s809AZA(1)(b) blocks the other routes (unless there is a corresponding gift of the relevant asset).

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10th Sep 2014 11:46

Because

In order for dad to be able to grant an interest in the land (that is what a tenancy is), he would (as a matter of land law) have to hold a greater interest in the land.

So son has implicitly granted dad sufficient an interest in the land (to be able to grant the tenancy) at an implicit (market value) premium. That is a CGT part disposal.

Perhaps Dad does not want any part of the flat (or an interest representing it) in his estate for IHT purposes? Otherwise son could just give the frigging thing back!

Nothing prevents the OP doing what thew want to do, but the tax consequences need to be appreciated and taken into account.

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By lisler
to mr. mischief
10th Sep 2014 16:11

Sub tenancy?

Would the anti-avoidance provisions apply in the situation where the son granted a tenancy to his father who then sub let to a third party?

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10th Sep 2014 16:26

No

I do not think the anti-avoidance kicks in in the partnership situation, incidentally.

Leasing back to the father is a CGT part disposal, which may or may not be an issue.

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10th Sep 2014 17:12

This anti-avoidance regime was not aimed at the current scenario - there being no CGT advantage.

Whether it catches this situation will need ultimately to be determined by the courts. I don't think it would prevent my advising a client to proceed - so long as he/she understands all the implications.

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10th Sep 2014 17:17

I do not understand

What has there not being any CGT advantage got to do with it? I must be misunderstanding.

Are you saying that granting a lease is not a part disposal, and that father and son being connected means that there are not deemed market value proceeds?

Or are you saying that the transfer of income streams legislation cannot apply where there is no CGT advantage? because I cannot find that point in the legislation.

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10th Sep 2014 18:42

@Portia

1. My post was related to the OP's initial question.

2. No - see 1. above.

3. No - see 1. above.

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11th Sep 2014 11:44

I think a gift of a (short term) lease

Would be OK to shift the income without s809aza problems. (Non-residents often do that with offshore companies to get the tax rate down from 45% to 20% and often it possible to do this without any SDLT etc. problems. Gifting (reversionary) leases is also popular IHT planning.)

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