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JOINT PROPERTY RENTAL INCOME NOT HUSBAND AND WIFE - TAX ENQUIRY

JOINT PROPERTY RENTAL INCOME NOT HUSBAND AND...

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Hi everyone. Having a bit of a tussle with a local HMRC compliance officer concerning my client.

Here's a brief summary

My client owns several properties with his partner (not husband and wife) All the income and expenses have been recorded on her tax return. The tax officer has opened an enquiry into my client stating that she has information from a 'contact' that my client solely owns 3 of the properties and as such has incorrectly completed his self assessment tax returns. She has asked for details of all properties, income and expenses and detailed supporting evidence with a view to assessing any liabilities. She has also stated that a Form 17 should have been completed if 50:50 split has been changed. She knows that my client is not married.

Am I correct in thinking that

1. My client is able to agree that even though he owns 50% of the property he can still agree to his partner receiving all of the rental income.

2. I am able to reply to the local compliance officer stating that no income was received from any of the properties and was correctly recorded on his partners returns for each year.

Thanks for all your wonderful help and advice. The tax lady in question is a bit of a dragon!!

Lugalugs

Replies (14)

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By nogammonsinanundoubledgame
14th Jun 2011 14:39

There is some indication ...

... in HMRC manuals, that what you have done may be permitted.

http://www.hmrc.gov.uk/manuals/pimmanual/PIM1030.htm

"Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed"

The quoted section goes on to consider the situation of a married couple, which are subject to different rules, but as that does not apply I do not reproduce it here.

Your clients have taken this somewhat to extremes.  Would I be right in assuming that the taxpaying partner happens to pay tax at a lower marginal rate than would have been applicable on the partner who declared no income from this source?  There may be some scope for the settlements anti-avoidance legislation to bite, unless you have quite strong documentary evidence that the individual who settled the income on his partner received no subsequent benefit from that income.  This would be a rather onerous position to justify given the typical financial arrangements of domestic partners, married or otherwise.

Still, perhaps at this stage it would be best simply to quote that passage back to the Inspector and point out that all rental income has been brought into charge.  If the Inspector continues to make a meal out of it then ask him or her to specify the precise charging provision that he or she has in mind (without prompting) to see whether it is the settlements legislation route that they are going down.  It would certainly be worth putting on record that the form 17 election only applies to married couples.  Can't hurt to put them on the defensive.

With kind regards

Clint Westwood

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By Steve Holloway
14th Jun 2011 14:46

Seems confused ...

 as form 17 only applies to married couples (or civil partners) so perhaps the inspector thinks the relationship is other than it is? So this looks like a 'simple' settlements legislation question. If the husband has retained the benefit of the income then he will be taxed on it ... if not it would appear to be OK. You could presumably (and possibly wisely) have set up a formal partnership to achieve this?

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By Lugalugs
14th Jun 2011 14:59

TAX ENQUIRY

Hi Clint and Steve

Thanks so much for your replies. The situation is that there are no profits from any of the properties. And my clients partner who has declared all the lossess on her tax return is already a higher rate tax payer as opposed to my client who is a basic rate tax payer. The bank account where all the rental income is paid into is in my clients partners name only and so I feel that this is more than enough evidence that my client receives no interest in any of the properties.

The simple fact is that the inspector is acting on incorrect information supplied by her contact and will not budge an inch!

Lugalugs

 

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By Steve Holloway
14th Jun 2011 15:09

I am left with the 'why' question!

 The additional information just makes me feel that I have missed an angle on this ... why would they arrange it this way? Does the partner have rental profits in her own right with which she is setting off these losses? I'm not sure it changes anything from what Clint and I have already said ... just interested!

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By Lugalugs
14th Jun 2011 16:12

YOUR QUESTIONS ANSWERED!!

Hi Steve.

That was the same question I asked my client when he informed me of the arrangement!! It would appear that he does not want anything to do with the rental of the property and is only named on the mortgage and joint owner in case of something 'going wrong' in the relationship. 

Right I'm off now to try and write a nice but firm letter to HMRC!

Any ideas on the style would be much appreciated. Am still quite a novice at this!!

Lugalugs 

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By Steve Holloway
14th Jun 2011 17:22

Polite, patient but firm!

 State the facts, the relevant statutory references and leave any emotion or frustration at the door. If you want a fight then write an agressive letter and wait and see what happens .... inspectors are only human beings in search of an easy life too! In 25 years I have never had to write a 'bolshy' letter to them and I have had some great results.

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By giannina
14th Jun 2011 18:40

Jointly Owned property

Follow this link to an excellent aerticle on Taxationweb on your dilema.

 

The link is to the 2nd article there is a nother article which onvce on the site I'm sure you will find.

http://www.taxationweb.co.uk/tax-articles/page-6.html

 

Tony Margaritelli - Chair ICPA

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By Lugalugs
15th Jun 2011 10:23

JOINTLY OWNED PROPERTY

Thanks guys.

You have all been a great help. Think I'm going along the same way of thinking as you Steve. Don't like to dictate to any inspector as I always feel that they know what they are doing but like me I suppose, they can't know everything. Just a little annoyed that this has all come about by a mistake on her part. Will have to soak up the time taken to resolve it too.

 

Lugalugs

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By tladirect
15th Jun 2011 11:38

Just an observation...
You have received some very good answers...but...

your client cannot be surprised about the HMRC's interest in his/their affairs and I do wonder if he has been entirely "frank" with you. It is a difficult situation to "square-up" because even at the most superficial level:

1) Presumably the purpose of owning rental properties is to generate income and thus profit.
2) Your client presumably contributed to the purchase of the property in question. If he wanted to protect his contribution but did not want to be involved in it's rental activity he could simply have made a loan to his partner and placed a charge over the property.

There are many other facets to this that spring to mind but I don't wish to bore anyone. It is just that there is a very conspicuous disparity between what an observer can see and what he is being told and if I were a HMRC inspector I would be suspicious!

Best of luck

tladirect

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
15th Jun 2011 22:10

"Something doesn't make sense"

When I was off ill, I spent a bit of time watching daytime TV and got quite hooked by a show called "Judge Judy". She is quite a dragon, but seems to have innate common sense and a very good eye for whether someone is telling the truth or not. One of her little sayaings is "If something doesn't make sense, then it's probably not right", and she questions over and over until she gets at what is going on. I'm not for a minute suggesting that that should be YOUR approach, but I suspect that is the compliance officer's approach. It just doesn't quite stack up...

The info she has is probably from land registry or details from mortgage company - they have a very clever computer that can match up all sorts of data now, so that is probably the source of the query. That said, the form 17 quote is just plain wrong, so you have the upper hand there. If you're happy you've got the full story from your client then stick to your guns and good luck.

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By Lugalugs
16th Jun 2011 10:37

GOOD OLD JUDGE JUDY!!!!

Hi Rebecca! I too agree with you on the Judge Judy approach, common sense all the way!

However, I am convinced by what my client says in that he simply does not have anything to do with the collection of rents or payment of expenses for any of the properties. I have seen the TR1 forms for the transfer of the properties from my clients partners sole names into joint names for which the officer insists are in my clients sole name only and have copied them and forwarded to her. My client has also confirmed with the land registry office that they are in joint names. The bank account for which rents are received into are also only in my clients partners name. I have given her all the info concerning the property details and again confirmed that no income has been received by him but has all been brought into charge on his partners tax returns.

She did stress that it was information from a 'contact' that had shown sole ownership by my client of some of the properties and this has never been the case.

Will I still have to provide all details of income and expenses for the properties even if none was received by my client?

Hopefully common sense will prevail and the enquiry closed asap.

Thanks everyone. Have really enjoyed my first experience of accounting web forum!!

Lugalugs

 

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By Old Greying Accountant
16th Jun 2011 13:17

Reminds me of "Hot Fuzz"

He is not Judge Judy and Executioner

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By JWB
20th Jun 2011 20:02

CGT

Don't forget that this allocation of income between partners may impact CGT when they come to sell the properties ....

Am I correct in this thinking?

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By Lugalugs
06th Jul 2011 12:13

REPLY FROM REVENUE! WANTS MORE INFO

Hi everyone!

Help required again. HMRC have replied to my letter stating that she can now accept that the properties were jointly owned and never solely. She also states that I am correct that Form 17 does not apply.

She now wishes to have sight of the original agreement between my client and his partner that he has no financial interest in the properties and also to explain why they were transferred into joint names and joint mortgages.

My questions are:

1. There was no written formal agreement between my client and his partner only a verbal ongoing one. Is this a problem?

2. The reasons for the transfer of the properties into joint names was a personal relationship one. Do I have to explain that to HMRC or can I simply say 'not relevant'

Thoughts and ideas would be helpful

Lugalugs

 

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