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Mother & Son But to let - unequal share

Mother & Son But to let - unequal share

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Mother and son have purchased buy to let property.

Mother invests £50k and son takes mortgage for balance say £300k.

Son pays tax at 40%, mother at basic rate. 

Are they allowed to split the rental income in any other proportion than that of the ownership ratio to reduce tax liability?

Son thinks they can, I am now wondering.

Son will claim his mortgage interest as allowable expense.

Thanks for any thoughts.

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By JCresswellTax
22nd Oct 2013 16:36

Not split the income

But they can split the profits in any ratio that they choose.

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Replying to Ruddles:
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By John Cotter
22nd Oct 2013 17:04

Answering my own question - HMRC guidance:

Jointly owned property - no partnership

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.

 

Thanks J Cresswell

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By MDK45
22nd Oct 2013 17:31

Does there have to be a legal agreement? Seems very wooley to me.

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By John Cotter
23rd Oct 2013 10:55

There does have to be an agreement on the share but it appears to be nothing formal from what I can see.

It makes me wonder if that agreement can be changed from time to time.

I was rather surprised that HMRC have such a free range approach.

 

 

 

 

 

 

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By ireallyshouldknowthisbut
23rd Oct 2013 10:57

.

The key surely is to ensure the correct % of the profits end up with the correct person.

That is to say you are going to be a tricky one if the son takes 100% of the rental income and mum sees none. 

If however you set it up such that mum takes the lions shares then there ought not be a problem for her to declare what is clearly her income, as hey look its been paid to her bank account. 

Where I think you will fall flat is to decide after the event what is happening unless the income has all gone into a joint account and none been paid out.

 If mum makes gifts to her son and a completely unconnected event then that is upto them. 

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By MDK45
23rd Oct 2013 11:37

Just seems odd to me after the fight of husband and wife re arctic systems that mum and son get a free allocation pass!

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By King_Maker
23rd Oct 2013 12:08

The 2004 case of Kings v. King allows one (unmarried) owner to "surrender" his/her income rights to another. Rather intriguingly, this was HMRC's argument and they won the case.

However, this was before the enactment of section 809AZA ITA 2007 which could change the situation.

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By bggoose1
25th Oct 2013 11:54

Partnership

Under general law I thnk that you have a partnership, a partnership being defined as "Partnership is the relation which subsists between persons carrying on a business in common with a view of profit"  (s1 Partnership Act 1890). If that is accepted that you have a partnership, albeit informal, you are then within s850 ITTOIA which allows you to allocate profits "in accordance with the firm's profit sharing arrangements" ie you are free to set the profit sharing ratios as you see fit.

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Replying to Matrix:
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By John Cotter
25th Oct 2013 12:18

Partnership under General law - perhaps....

However, not according to HMRC.

See below extract from PIM1030:

PIM1030 - Introduction: jointly owned property & partnershipsWhen does a partnership exist?

Whether or not a taxpayer is a member of a partnership depends on the facts. A partnership is unlikely to exist where the taxpayer is one of a group of joint owners who merely let a property that they jointly own. On the other hand, there could be a partnership where the taxpayer is one of a group of joint owners who:

let the jointly owned property, andprovide significant additional services in return for payment.

Much depends on the amount of business activity involved. The existence of a partnership depends on a degree of organisation similar to that required in an ordinary commercial business.

Bear in mind that the existence of a partnership can have important legal consequences quite apart from tax; the taxpayer may be liable for partnership debts for example.

For more information about the tax treatment of partnerships see BIM72000 onwards.

However, either way as long as they are not married, they can split profits as they see fit.

That said as posted previously, it is important the profits are seen to be shared in accordance with the agreement.

Thanks for all help on this somewhat liberal and, what I see as bizarre and inconsistent, ruling from HMRC.

 

 

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By KH
25th Oct 2013 12:06

As long as not spouses, no problem

Only spouses have to share rental profits according to percentage ownership ... unless this has been changed recently, which I doubt. Unmarried people can split beneficial ownership percentages as they see fit.

Regards KH

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By Justin Bryant
29th Oct 2013 16:47

This has been answered before

See:

https://www.accountingweb.co.uk/anyanswers/question/rental-income-share-between-two-people-who-live-together

809AZA ITA 2007 should not apply if the current sharing position was the same as that from the start.

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