Rental income to partner for managing pre marriage

I owned a property before marriage. Can rental income go to partner for managing the house

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I owned my main and only property before marriage and meeting my partner.

Before we got married, I rented my property and moved to a new city (and rented jointly) where my yet to be husband joined me a couple of months later, and once married. 

When I let the property out (pre marriage) my partner, at the time he agreed to manage the property, deal with the tenants, any problems etc. He was on the tenancy agreement as a landlord from the outset and rental income was paid into his account. We weren't living together at the time.

Even though he had no legal ownership for the property, as soon as he became landlord he does have legal obligations to the tenants. 

He is a lower tax payer and has been declaring the rental income he received. Could being on the tenancy act as evidence of his role of managing role from the outset?

This has been going on for just over a year and we are now looking to sell in the next financial year.

We weren't married or living together when the arrangement started and had only known each other for less than a year. (Things moved quickly, I know)

When looking into things further as we want to sell the rented place, we haven't done a declaration of trust at the time or since. Presumably, when this first started, a declaration wasn't needed as we weren't married or living together?

It's been 1.5 years since this started. We have just bought a house together and will sell the rented property within 12 months to claim back the higher SDLT and it's not really worth keeping the rented place.

Some CGT may be paid when the property is sold so this may flag up with hmrc. I've not declared rental income as I didn't receive anything from the outset. So it may seem strange when CGT is paid but no rental income declared?

Have we done anything wrong? Or should have done something different?

If something has been done wrong, what's the best way to resolve this for when it comes to selling the property or sorting it out now?

He had genuinely managed the property and tenants and when issues arrose he sorted them, so he was the managing agent. I thought it to be the same as an estate agent taking a chunk to do the same. This arrangement started before we were married and technically things could have fallen through and he would remain the landlord.

The original tenancy was renewed recently under the same terms as last year. 

Replies (30)

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By David Ex
24th Feb 2024 10:31

You need an accountant. If you’re saying you haven’t declared rent arising on a property you own then you need an accountant as a matter of urgency.

https://find.icaew.com/

Other professional bodies are available.

https://www.accountingweb.co.uk/any-answers/how-to-use-any-answers

“If you intend to plan a course of action based on what you read in here, you should instead be taking professional advice.”

“They are not here to provide free accounting advice.”

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Replying to David Ex:
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By Family2024
24th Feb 2024 10:51

I didn't receive any income from the property and nothing paid into my account. So I had no profit or income to declare.

It was my partner who received the income and declared it.

^ Or is that not how it works in our circumstances?

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Replying to Family2024:
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By Wanderer
24th Feb 2024 10:56

The account into which the income is paid doesn't determine who is taxable on it.

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Replying to Family2024:
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By David Ex
24th Feb 2024 11:15

Family2024 wrote:

I didn't receive any income from the property and nothing paid into my account. So I had no profit or income to declare.

It was my partner who received the income and declared it.

^ Or is that not how it works in our circumstances?

You need an accountant who will explain it all to you. I’d do it sooner rather than later.

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Replying to David Ex:
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By Family2024
24th Feb 2024 12:36

Thank you. We'll definitely contact one.

Good thing at least is when the rent started that covered just a few months for that financial year and there was very small income after estate agent fees and intial set up fees. So there will be little.

The current financial year is when we actually made profit so we'll declare it correctly following the tax adviser advice.

I'm still surprised that my partner can't pay someone she's not married to or cohabiting with to manage the property and keep rent profit. I'll see what the tax advisor says

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Replying to Family2024:
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By David Ex
24th Feb 2024 12:42

Family2024 wrote:

I'm still surprised that my partner can't pay someone she's not married to or cohabiting with to manage the property and keep rent profit.

If you know anyone else who owns a rental property but will give me the entire rent as a “management fee”, please PM me details.

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By OldParkAcct
24th Feb 2024 11:01

In addition to the tax problems you have created, if your partner has been acting as the managing agent, they should have also registered with HMRC as an agent for AML.

I am guessing they have not done this and suspect the penalties for non-registration will exceed the tax your are seeking to evade.

You both need to speak to an accountant who will help you with the disclosure to minimise further penalties from a non-prompted enquiry.

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Replying to OldParkAcct:
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By Family2024
24th Feb 2024 13:00

Looking into AML. This doesn't seem relevant to us. However will speak to tax advisor and follow their advice

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Replying to OldParkAcct:
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By Justin Bryant
25th Feb 2024 08:18

As others explain below, that's wrong in this case. See Reg 27, para (7A)(ii) here: https://www.legislation.gov.uk/uksi/2017/692/regulation/27?view=plain

This applies from 10.1.20. See:https://www.legislation.gov.uk/uksi/2019/1511/regulation/5/made

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Replying to Justin Bryant:
By Ruddles
26th Feb 2024 14:57

Justin Bryant wrote:

As others explain below, that's wrong in this case.


I think that I would have inserted a "probably" in there.
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Replying to Ruddles:
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By Justin Bryant
26th Feb 2024 16:16

Yes; and I guess you probably think Vladimir Putin is probably a liar and that bears probably sh*t in the woods etc.

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Replying to Justin Bryant:
By Ruddles
26th Feb 2024 16:30

Turn it on its head, then - what makes you think that you can say with absolute 100% certainty, beyond any shadow of a doubt, and without having to make any assumptions, that the legislation doesn't apply in the OP's case?

Re your two examples, "probably" is inappropriate, since I have seen evidence of both. However, I have seen nothing yet which demonstrates that the legislation definitely does not apply in the OP's case. It is very likely that it doesn't, but very likely is not certainly. I was always instructed that when giving tax advice one should be very wary about saying "would" rather than "should", "will" rather than "may" etc when there is any scope whatsoever for a different outcome.

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By FactChecker
24th Feb 2024 12:40

If you think others are being unduly non-specific (which is because they're not allowed to do so via a public forum rather than as a retained adviser) or unduly alarmist ... have a read of a reasonably recent thread here at https://www.accountingweb.co.uk/any-answers/fancy-a-bit-of-pickle-for-lunch

It's not an identical scenario but touches on several points that you may wish to discuss with your adviser ... and note in particular the final comment on that thread from TD.

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Replying to FactChecker:
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By Family2024
24th Feb 2024 13:12

Thank for directing me here. That forum provided some clarity as to what to expect

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By fawltybasil2575
24th Feb 2024 13:11

@ Family2024 (OP).

I concur previous posters’ recommendations that you should obtain professional advice, in view especially of the possibly anomalous taxation aspects of the arrangement between you and your partner.

Frankly, overall, if handled correctly, the facts which you provide, if complete and accurate, should ensure that neither you nor your partner are in beach of any taxation legislation. The circumstances, however, being abnormal, require experienced handling by a professional. In making those comments, I am mindful of the timing factor, ie the fact that the rents only commenced on or around August 2022 (your having advised that your partner has already timeously declared his “rental income”, if such it technically be, presumably on a 2022/23 Self-Assessment Tax Return or by other means).

In making the above comments, I do not dismiss the possibility of HMRC’s challenging the arrangement under which you have effectively let the property, to your partner, such that your partner has “sublet” it to the tenant, hence your own net income from the property being Nil (which is fundamentally what I understand you believe anyway).

I would have to respectfully express doubts re the comments by OldParkAcct, in relation to AML regulation requirements. Whilst not professing any formal knowledge of the legislation, I understand that for a relatively small managing agent role, your partner’s income from the property would fall materially below the threshold above which registration under AML is mandatory, as per the following link from GOV.Uk guidance (except in the unlikely event that the property at issue generates rental income of over 10,000 Euros per month):--

https://www.gov.uk/guidance/money-laundering-supervision-for-letting-age...

Looking to the (possibly imminent, re the expectation of selling the property) future, there may also be legal (as opposed to accountancy) aspects which require action, re the ownership of the rented property, prior to its being sold, to reduce the impact of CGT on the disposal of the property, but an accountant should (if not able to deal with those strictly legal aspects) be able to obtain such legal advice from a suitably qualified person.

Overall, the essence of my answer is that, as previous posters have said, a suitably qualified accountant and/or taxation advisor, should be engaged ASAP (notwithstanding my advising, as above, that if your initial question and later comments are correct and complete, then there should not ultimately be any adverse consequences from the manner in which you and your partner have dealt with this property income thus far - except the important, albeit IMHO relatively small, possibility of HMRC's challenging the interpretation of the facts and, if HMRC maintain that challenge, the FTT's accepting such HMRC stance).

Basil.

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Replying to fawltybasil2575:
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By David Ex
24th Feb 2024 13:25

fawltybasil2575 wrote:

Frankly, overall, if handled correctly, the facts which you provide, if complete and accurate, should ensure that neither you nor your partner are in beach of any taxation legislation.

Interesting conclusion.

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Replying to fawltybasil2575:
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By fawltybasil2575
24th Feb 2024 13:33

@ Family 2024 (OP).

Just to add to my last post, you should of course, show to your accountant (and/or taxation advisor) and solicitor (if and when appointed) a copy of the "tenancy agreement" (per your initial question): you MAY, as a consequence, receive a recommendation that an amended agreement would be wise (ie to reflect the correct status of your partner in that agreement).

Basil.

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Replying to fawltybasil2575:
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By Family2024
24th Feb 2024 14:35

Thank you for your comments/thoughts on the situation. Somewhat reassuring but seems like I definitely need official financial/tax advice before I can sit back.

I've got the tenancy and paper trail from the beginning of the tenancy that confirms all that I've said above so hope that helps the situation.

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By lionofludesch
24th Feb 2024 16:56

"I've not declared rental income as I didn't receive anything from the outset."

Cash basis?

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Replying to lionofludesch:
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By Family2024
24th Feb 2024 17:12

No. The tenancy agreement from the outset was for payment to go into my partner bank account account. He managed the rent, tenants and sorted out problems when they arose with the property.

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Replying to Family2024:
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By lionofludesch
24th Feb 2024 17:31

You've misunderstood my comment but just because an "agent" banks the money doesn't mean the money is his. Estate agents accept rent. They bank the money. They deduct their fees. They send the rest to the owner of the property.

Did you have a contract with your new husband? What evidence do you have that he was entitled to keep the entire rent as a fee for his work? Just in case HMRC wonder why his charges were so high.

He didn't own the property. He wasn't the landlord.

Anyway, you've said you're going to take advice. But these are some indications of the problems.

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Replying to lionofludesch:
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By Family2024
25th Feb 2024 09:50

We don't have a written contract but agreed this arrangement from the outset and he never transferred or sent to me money he gained.

He is a named landlord on the tenancy agreement from the outset, before we were married or cohabiting, so the tenants can make a claim for breach of contract from either us and still can, even though he isn't the property owner or have legal title. Suppose this in itself is evidence of our arrangement and the fact he managed the property and service and ground rent charges and sorted a fault out when that arose.

I considered our arrangement a bit like when I hear in the news of a large company selling itself to another for a token amount. Its clearly worth more but its a legitimate agreement/arrangement, similar to what we had in place.

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Replying to Family2024:
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By lionofludesch
25th Feb 2024 10:03

Family2024 wrote:

We don't have a written contract but agreed this arrangement from the outset and he never transferred or sent to me money he gained.

He is a named landlord on the tenancy agreement from the outset, before we were married or cohabiting, so the tenants can make a claim for breach of contract from either us and still can, even though he isn't the property owner or have legal title. Suppose this in itself is evidence of our arrangement and the fact he managed the property and service and ground rent charges and sorted a fault out when that arose.

I considered our arrangement a bit like when I hear in the news of a large company selling itself to another for a token amount. Its clearly worth more but its a legitimate agreement/arrangement, similar to what we had in place.

Well, I'm convinced.

But it's HMRC who you need to convince. It all looks very tax-arrangementy, doesn't it?

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Replying to lionofludesch:
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By Family2024
25th Feb 2024 12:03

True, but we did think because of our circumstances and situation at the time that it would be above board.

In hindsight we should have sought financial advice at the time. Looking into it now, we would have probably been told not to rent the property for a year and avoid CTG and tax on rent. So overall we are down more for having rented than if we hadn't rented and kept it on the market to sell. (It had fallen through twice at that point)

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Replying to Family2024:
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By DKB-Sheffield
25th Feb 2024 12:48

Just to give some reassurance... you seem to be taking the right corrective approach in contacting an adviser.

You are not alone in this... the (specific) LPC shows just how regularly this situation occurs!

The good news is this sounds like 18 months. Usually the we have to resort to quoting Ace/ Paul Carrack in saying "How Long (has this been going on)?"... often followed up by "How Long?!" (when the answer is 25 years) or, "What do you mean you haven't got a clue?!"

You may have a point about CGT which could have made you (marginally) worse off due to letting - too much to go into on here though. However, unless there was an imminent chance - or intent - to sell (thus triggering CGT issues), the income from letting (after IT), plus the overhead costs saved (rates, standing charges etc.) on the empty property, would almost certainly exceed £nil (for a period of continual letting) IME. I would think - even advice at the outset would not have led an adviser to lead you down the route of leaving a property empty - the trigger to sell seeming to be the purchase of your marital home (now)... not the commencement of your relationship in 2022.

The key now is to sort it out. Yes, there'll likely be additional tax to pay (and some interest - possibly surcharges), and adviser's fees, but for 18 months (11 not yet due to be reported), it should be a simple exercise.

I would suggest you define (to the tax adviser) exactly what the structure of the verbal agreement is though... your friend/ boyfriend/ husband could not have been a landlord AND a managing agent! Further... property income and management (trading) income would be reported differently (the latter potentially being NI-able)

As a warning for future... don't seek tax advice from a managing agent (Usually they say what they do - often stating HMRC have accepted it- not what is correct. What they mean is they haven't been 'caught out'). Additionally, don't seek to draw comparisons between your situation and others (particularly large corporations with huge tax and legal departments) - tax is not simple... even less so given you are referring to 2 very differents ends of the entire rax spectrum - Corporation Tax (on acquisitions) and Individual (UK Property) Income Tax (it's not the same tax, and even UK Property Income has different legislation/ guidance to UK Trading Income.

Good luck... it sounds like you're (now) heading in the right direction.

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Replying to Family2024:
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By David Ex
25th Feb 2024 10:42

Family2024 wrote:

I considered our arrangement a bit like when I hear in the news of a large company selling itself to another for a token amount. Its clearly worth more but its a legitimate agreement/arrangement, similar to what we had in place.

With due respect, I think we’re into “a little knowledge …” territory.

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Replying to David Ex:
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By Family2024
25th Feb 2024 12:12

You are correct, we had basic knowledge when considering at the time and applied the approach of a managing landlord to justify the arrangement. We thought it was a unique circumstances that can make things work in our favour.

However recently we started questioning it. The first year of the tenancy we weren't married at the time or cohabiting so the arrangement should presumably be okay. When the tenancy renewed under the same conditions we were married so at that point is the arrangement a continuation of what we had before (and hopefully fine) or of it was fine, maybe no longer from the tenancy renewal because we are married from that point.

After finding and speaking to tax and financial advisor and this is all sorted, I'll come back to post the outcome.

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Replying to Family2024:
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By Wanderer
25th Feb 2024 12:55

Family2024 wrote:

The first year of the tenancy we weren't married at the time or cohabiting so the arrangement should presumably be okay.

You really should stop making such presumptions.
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By More unearned luck
26th Feb 2024 17:01

Kings v King & Kings v Barker 2004 STC (SCD) 186, Sp C 402 might be relevant. Ask your accountant if it is.

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Replying to More unearned luck:
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By Family2024
26th Feb 2024 18:01

More unearned luck wrote:

Kings v King & Kings v Barker 2004 STC (SCD) 186, Sp C 402 might be relevant. Ask your accountant if it is.

Thank you for this information. I've just had a quick search into this and see how it could be relevant/applicable. I couldn't find the full case just reference to it and summary, but I will definitely mention this!

Hopefully it's something they will already be aware about (a sign I've instructed the right person?).

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