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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Sounds like it's the parents' income.
Which makes you wonder if it's really the parent's asset.
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.
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.
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!
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.
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.
@ 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.