Tax on property rental

Property owned 3 ways where 1 party lives in it alongside other tenants. What should be declared?

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I have been asked to help complete tax returns for a family who's 3 children jointly own a property.  One of the owners is a student and lives in the property with the remaining rooms in the property being let to 2 more tenants.  The other 2 siblings are UK tax payers.  What should we be declaring on the tax returns??

- nil for the one living in it and then 50/50 to the other 2 based on the tenants income and 2/3rd expenses?

- nil for the one living in it and then 1/3rd each based on the tenants??

- include a deemed rent for the one living in it and then split 3 ways???

- any other suggestions???

 

Replies (15)

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By Tax Dragon
30th Apr 2019 11:27

Who's getting what?????

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Replying to Tax Dragon:
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By E Scott
30th Apr 2019 11:37

The only drawing that’s been made from the bank account was made to the parents! I think in reality the income just pays for the one living in it.

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Replying to E Scott:
RLI
By lionofludesch
30th Apr 2019 11:53

Sounds like it's the parents' income.

Which makes you wonder if it's really the parent's asset.

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Replying to lionofludesch:
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By E Scott
30th Apr 2019 12:16

It was inherited from a grandparent!

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Replying to E Scott:
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By lionofludesch
30th Apr 2019 12:26

Well, you probably need to dig around and find out why the parents are getting the money.

Or generally just dig around and find out what's happening.

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RLI
By lionofludesch
30th Apr 2019 11:35

What's the student paying ?

Has he effectively given up the right to receive rent in return for living there rent free ?

Ultimately, as Dragon says, who's getting what ?

If the student gets free rent plus a third of the rent from the other tenants, whilst the others merely get a third of the other tenants rent, he's getting quite a good deal.

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Replying to lionofludesch:
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By E Scott
30th Apr 2019 11:49

I totally agree with you here! In reality I think the rental income from 2 tenants covers the cost of the whole property so the student owner lives totally free and the other 2 get pretty much nothing.

One of the others did stay in the property previously so she to had the benefit at one point in time. The 3rd has never had the benefit and is a higher rate tax payer so to me is being totally stung on this deal.

They have owned the property for years but never declared anything as until last year none of them were tax payers.

I was of the impression that rental had to be declared based on ownership unless otherwise opted to HMRC? Is this not the case? If it can all be taxed on the student then happy days as he has no other income.

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Replying to lionofludesch:
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By E Scott
30th Apr 2019 11:49

I totally agree with you here! In reality I think the rental income from 2 tenants covers the cost of the whole property so the student owner lives totally free and the other 2 get pretty much nothing.

One of the others did stay in the property previously so she to had the benefit at one point in time. The 3rd has never had the benefit and is a higher rate tax payer so to me is being totally stung on this deal.

They have owned the property for years but never declared anything as until last year none of them were tax payers.

I was of the impression that rental had to be declared based on ownership unless otherwise opted to HMRC? Is this not the case? If it can all be taxed on the student then happy days as he has no other income.

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By alisonis
30th Apr 2019 12:54

The income should be taxed according to the ownership. So if the three children inherited it then all rents received should strictly be split three ways, as should the expenses. The fact the parents are receiving the rents and that one may be living there rent free is irrelevant. Sounds like they need to have a family meeting about this!

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Replying to alisonis:
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By John R
30th Apr 2019 13:51

I disagree. According to HMRC:"The share of any profit or loss arising from the 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."

Note that it is what is agreed rather than what is paid so the OP needs to find out what was agreed and, if necessary, get it agreed (possibly retrospectively).

As the parents have received payments, are these fees for management? If so, the parents need to declare them and the joint owners will be entitled to deduct them as an expense. Otherwise, the payments are possibly loans to the parents.

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By ireallyshouldknowthisbut
30th Apr 2019 13:51

Go back to basics.

What is in writing in terms of arrangements between the 3 children and the parents?
What does the tenancy agreement say?
Where the the money banked?
What happens to the money?
Are there any written or (imputed from the above) implied trusts?

Legal ownership would be fairly well down my list of things to look at in this situation.

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Replying to ireallyshouldknowthisbut:
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By E Scott
30th Apr 2019 15:05

There are no written arrangements between the children and they consider the money given to their parents to be a loan that will not be repaid, so in my mind a gift! I suspect the reality is that they view it as their grandparents money that was passed to them for estate planning purposes and therefore if their parents need money they are happy to give them it. In many circumstances the property would have been passed to the parent and not to them.

All rental money is banked into a joint bank account between 3 parties and used to pay for bills, repairs etc on the property. When the funds build up they have replaced or redecorated so none of them have ever had a profit drawing. There is a substantial capital gain on the property and when sold the proceeds will be split 3 ways, and I imagine at that time the bank account balance also distributed 3 ways.

On the other hand the tax bills due on the 2 siblings as a result of owning this property will be paid from the joint account.

If it was a pure rental property to 3 tenants then it would be a simple 3 way split on the tax returns. My issue is the one living in it as he has a right to occupy.

The ownership will also cause issues with additional stamp duty etc for the older child in due course so there are many complications! If they were to follow my advise they would sell it, split the money and all go their separate ways!

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RLI
By lionofludesch
30th Apr 2019 15:42

There's a fair bit of thin ice around here.

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By fawltybasil2575
01st May 2019 10:36

@ E Scott (OP).

Given that (very importantly) the Gross Rents are receivable into a joint bank account in which each of the three siblings has (presumably) a one-third interest (and given correspondingly that the Rental Expenses are paid from that same joint bank account) then the Net Rents are taxable EQUALLY on the three siblings (subject to one “caveat” referred to below).

The fact that one sibling has a “good deal” (ie the “residing” sibling who lives at the property rent-free) does NOT affect how the Net Rents are apportioned for taxation purposes on the three siblings (since the legislation, and the HMRC guidance, allows the three parties to apportion the Net Rents in whichever proportions they wish, regardless of whether such apportionment favours one or more parties).

I take at face value the comment (in your post at 15.05 yesterday) that the monies paid from the joint account to the parents are either gifts or loans to the parents. As largely a separate matter, documentation should be prepared to clarify whether such monies are loans or gifts (essential to avoid both family dispute and IHT problems in the future; and also possibly to avoid the possibility of HMRC’s, albeit invalidly, seeking to treat such payments as rental income of the parents). In reality, the distinction (between gifts and loans) has no impact on the apportionment of the Net Rents on the three siblings.

The ”caveat” referred to above arises from your statement that the Income Tax payments in respect of the two “non-residing” siblings’ shares of the Net Rents (presumably because the “residing” sibling will not be liable to pay Income Tax on their share of the Net Rents) will be paid from the joint bank account. Arguably, and I would submit correctly, the apportionment of the Net Rents will NOT be equal in the year in which those Income Tax payments are made, since such payments will represent “prior shares of Net Rents” (akin to “prior shares of profit” in relation to formal partnerships - I trust that such ”prior shares” concept is clear).

Basil.

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Replying to fawltybasil2575:
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By E Scott
01st May 2019 11:38

Many thanks! This is in line with what I thought I should do but I know property is complex and wondered if there were any weird rules I wasn't aware of that would change my thoughts.

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