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Inter-spousal rental income-shifting

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New client with higher-rate income owns a Furnished Holiday Let - got married a couple of years ago and says the husband, a basic-rate taxpayer, now "runs the business" and has declared half of last year's earnings on his return. Apparently the previous accountant was satisfied that the property was jointly-owned by dint of their marriage, however they have not produced any paperwork indicating joint ownership. Moreover, I recall a conversation about a pre-nup whereby she retained sole ownership of the FHL. As such, I can see no justification for the income to be his and have suggested refiling last year's returns reverting the income solely to the owner. Client then denied the conversation about the pre-nup.

They're trying to pull a fast one, right? #disengage

Replies (20)

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By David Ex
27th Jan 2022 11:16

FHLs are taxed as a conventional business, aren’t they? In which case, is there a partnership?

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By Michael Beaver
27th Jan 2022 11:53

If the spouse is not a legal owner of the property I don't think she can include the income in the FHL part of her income tax return.

Instead she could charge for her services and declare the income as self employment income. This would then be a cost in the husband's FHL schedules reducing the taxable amount.

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Replying to michaelbeaver:
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By RobbieT
27th Jan 2022 12:41

Cheers Michael
A neat solution, thanks.
I'm disengaging them anyway, can't be dealing with the lack of transparency as well as the last-minuteness of it.

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Scooby
By gainsborough
27th Jan 2022 11:58

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-... re income split from FHLs but I agree that there would need to be some form of joint ownership first.

OP, have you double checked with the client that there were definitely no transfers of interest in the property upon marriage?

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Replying to gainsborough:
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By RobbieT
27th Jan 2022 12:22

Thanks Gainsborough - they haven't declared any transfers of interest to HMRC, indeed with reference to the pre-nup I believe they specifically have NOT varied ownership.

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Replying to gainsborough:
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By Justin Bryant
27th Jan 2022 12:55

Eh? The link does not state there needs to be joint legal ownership and is premised on sole legal ownership. So all's fine (provided H accepts W has a 50% beneficial equitable interest in the business and/or property - which appears to be the case).

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Replying to Justin Bryant:
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By I'msorryIhaven'taclue
27th Jan 2022 13:37

So W (the 100% owner in OP's case) has 100% legal ownership;
W treats H has having a 50% beneficial interest in the income.

I know there can be no Form 17 involved (because this is solely owned / FHL - take your pick). But would not a Declaration of Trust (or "Deed of Trust", perhaps) be necessary to so vary their beneficial interests from 100%/0% ?

footnote: If that is the case, I'm not so certain you have to lodge any DofT with HMRC these days. Not in cases where there's no Form 17 involved, that is.

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Replying to I'msorryIhaven'taclue:
Scooby
By gainsborough
27th Jan 2022 14:27

I appreciate the beneficial interest point but would it not strengthen the client's position for any future HMRC enquiry if there is a DofT in existence (agree that it doesn't have to be lodged with HMRC)?

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Replying to gainsborough:
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By I'msorryIhaven'taclue
27th Jan 2022 14:51

Ha ha, thanks Gainsborough... agreed, "Would not a DofT be necessary?" was just my daft long-winded way of saying that I believe a DofT would be necessary. (I'm not one to use three words when ten would do!)

But you've answered the part I wasn't sure about... that the DofT itself doesn't need to be lodged with HMRC. Not nowadays, at any rate.

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Replying to I'msorryIhaven'taclue:
Scooby
By gainsborough
27th Jan 2022 16:17

Lol...actually my daftness, as I meant to reply to Justin's comments/the thread in general but clicked on the wrong respond button.

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Replying to I'msorryIhaven'taclue:
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By Justin Bryant
27th Jan 2022 15:25

No is the short answer (and the above link certainly doesn't mention that's needed), but it would do no harm.

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Replying to Justin Bryant:
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By I'msorryIhaven'taclue
27th Jan 2022 16:12

Thanks Justin, I see the DofT filing requirement has been redacted / archived in HMRC's manuals but wasn't sure what requirements might have replaced it, or when.

So I guess we might conclude that the OP's prospect would need to produce a DofT for 100% sole-ownership property in order to be eligible for income-splitting with spouse. Regardless of whether lodged or not lodged with HMRC.

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Replying to I'msorryIhaven'taclue:
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By Justin Bryant
27th Jan 2022 16:15

Again, no is the short answer as I said above to this same question.

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Replying to Justin Bryant:
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By More unearned luck
27th Jan 2022 19:02

You have misread TSEM9820, Justin. HMRC's comment is predicated on the FHL being jointly owned, as it is saying that s836 doesn't apply and as that section only needs to be considered (and then dismissed) if the property is jointly owned.

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Replying to More unearned luck:
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By Justin Bryant
28th Jan 2022 10:58

Yes; I perhaps misread it (or misskim-read it) and instead meant it's premised on the s836 ITA 2007 rule not applying, which effectively makes it irrelevant if it's held legally jointly or solely and it's the agreement of the parties that counts and if held solely then a DoT would be recommended re any profit split. Thank you.

For those interested, if s836 does not apply, the basic beneficial ownership analysis re joint legal ownership is at para 166 (iv) here:

https://www.bailii.org/ew/cases/EWHC/Ch/2021/3443.html

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By David Ex
27th Jan 2022 12:16

I’m clueless (obviously) but if FHL is taxed as any other business, is there not a bog standard partnership? Do the partners in a partnership have to jointly own all the partnership assets?

Obviously the HMRC link says what it says but just wondered ….

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Replying to David Ex:
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By More unearned luck
27th Jan 2022 19:12

1) FHLs are not trades, although they are a pseudo-trade. You can always try arguing that they are a trade though, don't know how far you would get.
2) Partnerships are required to file partnership returns. That can't be done without a UTR for the partnership. What are the sanctions for late notification to HMRC of a partnership?

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Replying to More unearned luck:
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By David Ex
27th Jan 2022 23:22

More unearned luck wrote:

1) FHLs are not trades, although they are a pseudo-trade.

Explains my confusion! So there’s trade, non-trade/“investment” and something in the middle. Must be tax simplification.

More unearned luck wrote:

2) Partnerships are required to file partnership returns. That can't be done without a UTR for the partnership. What are the sanctions for late notification to HMRC of a partnership?

Yes, fair point.

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ALISK
By atleastisoundknowledgable...
27th Jan 2022 14:35

Love the #

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By More unearned luck
27th Jan 2022 19:17

The clients should have come to you before the alleged change to joint not afterwards.

For the future W gives H&W a licence. H&W then give a series of short term licences to the holidaymakers. The holidaymakers pay for their licences. H&W don't pay for their licence.

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