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Who is liable for tax on rent?

Is the person named on deeds always liable for tax on rent??

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Client’s mother signed 4 houses over to her years ago. Mother has since let the 4 properties out and not declared income. Client  has now received letter from HMRC to say she is liable for tax due. Client had never received a penny of this rent. I understand that the person named on the deeds is liable. Situation worsened by the fact that the client and mother had a bad fall out a couple years back. Is there any way that the liability can be moved from client to mother? I remember reading about a case which was very similar to this but can’t recall where I read it 

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Scooby
By gainsborough
25th Feb 2020 17:48

Does the Deed of Trust show capital and income beneficial interest was to be solely the mother's? If so, rental income should be taxed on the mother.

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By Kevinmck14
25th Feb 2020 17:55

Thanks very much for your reply. I’ll check if a deed of trust exists. Although 100% of the properties were signed over to my client and deed of trusts are mostly used for part-ownership arrangements I think?

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RLI
By lionofludesch
25th Feb 2020 18:10

Your client needs to be suing the mother for the rent.

Her mother has been fleecing her for years.

All this will be made so much easier by that falling out.

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Replying to lionofludesch:
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By Kevinmck14
25th Feb 2020 18:23

Yes I thought it may be a matter for the civil courts. Other options being just sell the houses from under her mother and pay the tax due with the proceeds. That will stop her getting fleeced!

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Replying to Kevinmck14:
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By bernard michael
26th Feb 2020 09:48

Kevinmck14 wrote:

Yes I thought it may be a matter for the civil courts. Other options being just sell the houses from under her mother and pay the tax due with the proceeds. That will stop her getting fleeced!

And a big CGT tax bill for the client

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By Roland195
25th Feb 2020 18:26

In my experience, "signing over" means little paperwork will exist along with the usual questions over CGT (can't be any, I only signed it over...) and Stamp Duty.

The real question is does your client actually believe it to be their property? Did they know anything about this?

I assume the landlord registration is in the name of the mother hence how they caught up with this who had tried to deflect by saying it's not her property? Argument to be made see retains control and beneficial ownership.

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Replying to Roland195:
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By Kevinmck14
26th Feb 2020 08:24

She knew the properties had been signed over years ago...not sure if she knew they were being rented out. She has never stepped foot in any of the properties or received any rental income, nor had to pay anything towards upkeep of the properties. She hasn’t spoke to her mum for a few years apparently. I would think that we have a decent argument that the mum was the beneficial owner.

I’m not sure how this came to light, im speaking to her later so will get more info then. If landlord registration is in mums name then that will hopefully increase the chances of the mum being classed as the beneficial owner

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RLI
By lionofludesch
26th Feb 2020 06:43

To be honest, the starting point is going to be finding out what the hell happened here.

Why is the mother letting out properties that she apparently doesn't own?

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Replying to lionofludesch:
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By Tax Dragon
26th Feb 2020 07:40

I'd hazard a guess that daughter knew it was happening.

OP, use your longest spoon.

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Replying to Tax Dragon:
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By Kevinmck14
26th Feb 2020 08:26

I think she knew her mum let out the properties but had no idea she would be liable for the tax on rental income

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Replying to Kevinmck14:
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By Tax Dragon
26th Feb 2020 09:35

Yet she knows Mum isn't declaring it?

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Replying to Tax Dragon:
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By Kevinmck14
26th Feb 2020 09:49

Yes because client received a letter through from HMRC in regards to it and obviously called her mum straight away. Mum tells her that income hasn’t been declared. Cue a blazing argument over the phone

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Replying to Kevinmck14:
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By lionofludesch
26th Feb 2020 09:53

Kevinmck14 wrote:

I think she knew her mum let out the properties but had no idea she would be liable for the tax on rental income

Well, someone's going to have to pay.

Who's on the rent book* ?

There's going to have to be some family discussion if your client isn't going to get stuck with the tax bill.

This is naïve in the extreme. Daughter is given houses, never visits them, allows mother to receive the rent and is surprised to receive a tax bill.

Make sure you have the facts before you debate this bizarre scenario with HMRC.

*Or whatever you get these days.

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ALISK
By atleastisoundknowledgable...
26th Feb 2020 08:09

Kevin - it seems like you had the same gut reaction I had ... sell one (or all) of the properties from under the mum. She’ll prob need to evict the tenants (from my years of experience of watching Nightmare Tenant, Slum Landlord (Ed.?)) to have vacant possession, but that’ll cut the mum’s income stream off and p155 her off royally.

The tax is probably her liability, she needs to sue her mum for the rent received. And/or raise it with the police. I’d go with and myself - in for a penny ...

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Replying to atleastisoundknowledgable...:
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By Tax Dragon
26th Feb 2020 09:39

You and I appear to have opposite views. But I reckon neither of us is a lawyer, so we're probably both wrong.

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Replying to atleastisoundknowledgable...:
By SteveHa
26th Feb 2020 09:42

I wouldn't be even getting involved with the mother's (or tenants) affairs other than to the extent of demonstrating that beneficial ownership does not lie with the OP's client (and so by extension, that it lies with mother).

The rest is outside of the remit of an accountant.

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Replying to SteveHa:
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By Tax Dragon
26th Feb 2020 10:00

Separation of legal and beneficial interest [IF that's what's happened here] indicates a trust. The trustee (the dude with the legal title - daughter) has responsibility to the beneficiary (mother). Never mind the (personal) falling out.

Unless the trust is bare (in which case daughter can't keep any proceeds of any sale), trustee also has responsibility for the tax (subject to a mandate).

What there ought to be is paperwork - documenting the trust and its nature and the mandate of the income. What there is is a DIY mess.

OP, good luck. (And your comments sound like you need to invest in a longer spoon.)

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Replying to atleastisoundknowledgable...:
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By Accountant A
15th Jun 2020 20:53

0[8t

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By Duggimon
26th Feb 2020 09:36

I would suggest immediately selling the houses, paying the tax due and telling the mother to beat it.

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By John R
26th Feb 2020 14:12

It is obvious to me that the reality is that the daughter has permitted mother to rent the properties out. Therefore, surely it can be argued that daughter has given mother a license to occupy the property i.e. she has let the property to mother on a rent-free basis. Mother has sublet to the tenants and retained the rents. Mother is therefore liable to income tax on the rents. It would help if mother's name is on the tenancy agreements. Legal advice should be sought if HMRC do not accept this.

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Replying to John R:
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By Tax Dragon
26th Feb 2020 15:02

John R wrote:

It is obvious to me that...

Objection! Leading the witness. (TBH, your guess is consistent with mine, as noted above, but it would be sensible - again, as noted above - not to get too involved and to let mother and daughter agree what they did (and, just as important, what they want now), with legal advice as necessary. Don't wait for HMRC to push them towards legal advice.)

Seeing as you've raised the subject though, do you have a view on the interplay between Ss17/18 and 22(1) of TCGA?

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Replying to Tax Dragon:
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By John R
26th Feb 2020 15:44

Mother's gift to daughter would, I believe, fall within SS17/18. Are you suggesting that there might then be a (deemed) capital sum taxable on the daughter as she has effectively given up her right to the income? If so, I cannot see that allowing a loved one to use an asset rent-free would be caught by this as the right to income and capital has not been disposed of but I have not researched this.

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Replying to John R:
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By Tax Dragon
26th Feb 2020 16:07

As long as we stay in the income tax Acts, there's no market value rule. As soon as you get into TCGA, MV rules crop up.

So consider this. I could grant you a licence to use my property rent free. But I would charge you a premium. (Given that there'd be no rent, don't be surprised if the premium is that little bit higher.) That premium would be taxable on me, in part at least, under s22.

Now, normally (but not necessarily), a licence to occupy would be at (landlord's) will. You won't pay me much of a premium if I can kick you out at will. In the mother/daughter case before us, there is more of a debate about what has happened. Daughter's apparent complete lack of interest suggests any licence to occupy is closer to a lease for life. In any event, for mother to have sublet (your contention), she must have been able to satisfy someone that she had enough of an interest in the property to be able to do that. Where did she get that interest (assuming no trust), if not by way of a disposal to her by the daughter? (And how did she prove her interest if not with paperwork?)

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Replying to Tax Dragon:
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By unearned luck
27th Feb 2020 01:16

"As long as we stay in the income tax Acts, there's no market value rule. As soon as you get into TCGA, MV rules crop up."

It's a pity Mr Veltema didn't know this!

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Replying to unearned luck:
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By Tax Dragon
27th Feb 2020 09:12

Yeah I don't know why I pluralised "Act" (and belittled the "I" and "T"). (I must have thought it made the point clearer. Reading back, I think it failed so to do!)

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Replying to John R:
RLI
By lionofludesch
26th Feb 2020 16:25

John R wrote:

Mother's gift to daughter would, I believe, fall within SS17/18. Are you suggesting that there might then be a (deemed) capital sum taxable on the daughter as she has effectively given up her right to the income? If so, I cannot see that allowing a loved one to use an asset rent-free would be caught by this as the right to income and capital has not been disposed of but I have not researched this.

Loved one ?

I thought they'd had a big fall out ?

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By justsotax
26th Feb 2020 15:14

I am trying to figure out a situation where I was gifted property and then received no income, paid no expenses and took no interest. Bizarre!

I think my initial advice is take a bit more interest in the things you own (if that is indeed the case).

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Replying to justsotax:
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By Tax Dragon
27th Feb 2020 09:17

I think we've seen situations like it in here before. One common cause is IHT evasion.

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Replying to Tax Dragon:
RLI
By lionofludesch
27th Feb 2020 09:34

Tax Dragon wrote:

I think we've seen situations like it in here before. One common cause is IHT evasion.

That was my initial thought but I was too polite to say.

Pigeons coming home to roost.

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Replying to lionofludesch:
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By Tax Dragon
27th Feb 2020 11:33

lionofludesch wrote:

That was my initial thought but I was too polite to say.

JoF called me a pussy[***] cat the other day. Cats. Yuck. (No offence, lion! :-)) They give you fur balls. Anyway, it took the wind from under my wings. I clearly need to be more fiery. [Though, if you saw the context of the comment, you'd appreciate the irony with which I speak... I cause the smoke of offence even without any fire!]

lionofludesch wrote:

Pigeons coming home to roost.

Not something to say to a pussy[***] cat.

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Replying to Tax Dragon:
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By Tax Dragon
27th Feb 2020 11:35

Maybe I misremember it slightly, as I don't recall JoF saying it with stars.

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By fawltybasil2575
27th Feb 2020 19:55

@ Kevinmck14 (OP).

IMHO one has to disregard all thoughts re current and future disputes (which MIGHT arise in due course from the client’s notifying HMRC that she has not received the income) between mother and daughter. I respectfully disagree views expressed above centred upon disposing of the property, such action being IMHO unnecessarily draconian and not conducive to restoring family harmony.

One must then concentrate on establishing if possible that the daughter/client neither received the income NOR IS ENTITLED TO receive it (the legislation unfortunately enables HMRC to extract tax from any taxpayer who either receives, or is entitled to receive, the rents – HMRC are however not entitled to receive tax “twice over”, ie on the same income, and hence persuading HMRC to collect the tax from the mother is a sound move).

I would be interested to see the wording of the HMRC letter to ascertain whether this letter claims that the client has RECEIVED the Rents (or whether alternatively it is worded less precisely so as to cover rents to which she would be entitled).

If (i) the HMRC letter claims that the client has RECEIVED the rents, and (ii) one then becomes satisfied fully that one’s client is being entirely truthful about not receiving those rents (see my later more detailed comments below) then one should write to HMRC to advise that the client has no knowledge of having RECEIVED any of the alleged rents, and ask HMRC to provide evidence to support its contention that she has received them.

To “show clean hands” it is advisable to add, into the letter to HMRC, a sentence to the effect of “My client is aware of a relative’s receiving rental income, of which she has no detailed knowledge (albeit the legal position may be somewhat clouded) which may explain your sending the letter of xx/xx/xxxx”

I have to ask whether you carried out your obligations, when taking on the client, to obtain a broad picture of her overall assets/liabilities. If perchance you DID make those enquiries with her, and if she failed to disclose her ownership of the four properties, then you should be asking her the question of WHY she omitted to notify you of those properties at the time of your appointment. If you are not satisfied with her answer to that question, this may well impact upon the crucial matter of whether you believe your client’s statement that she has not received the rents.

You must not notify HMRC that your client did not receive the rents if you do NOT BELIEVE such notification to be true.

At 8.24 on 9.24 on 26 February 2020 you said:-
“She hasn’t spoke to her mum for a few years apparently”,
but at 9.49 on 26 February 2020 you said that upon receiving the HMRC letter she:-
“obviously called her mum straight away”.

[perhaps the above inconsistency is, and forgive the pedantry, because “hasn’t” should have been “hadn’t” ?].

In the phone call to her mother, one would EXPECT that she would have asked her mother WHY she (mother) had received AND retained the rents, instead of (i) paying those rent monies over to her daughter and (ii) providing full information to her daughter to enable her (daughter) to thereafter receive the rents herself from the four rented properties.

One would ALSO EXPECT the daughter to have asked her mother WHY she had not declared the Rents to HMRC. These and other questions should be raised by you with your client, so that you have a clear picture of the seemingly incongruous arrangement [under which one party owns several rented properties but another party receives and retains the rents therefrom - it might be advisable to write to the mother, enclosing a suitable authority letter from your client, to request the REASON for her (the mother’s) still receiving rents - this may elicit information of which you are not fully aware].

There are several interesting posts above, from eminent members, with suggestions as to how the income can be validly “transferred” to the mother: which, if any, of those suggestions is the correct road to go down, will depend upon your obtaining a much clearer picture of the incongruous position referred to above.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
28th Feb 2020 09:46

Basil, you are a true professional (in every sense).

OP - you'd do well to heed this answer.

Basil, I wonder whether you would agree with The Dullard's comment at 11.50 on 25 February 2020 on this thread: https://www.accountingweb.co.uk/any-answers/associated-disposal-prior-to.... Bringing that thought to bear on the mother-daughter case before us, could mother have gifted the properties subject to retaining the right to use them? If so, would that have been a part disposal? I seem to recall that Lady Ingram did something like that - but she had to go through legal contortions to achieve that outcome. It wasn't easy. It certainly wasn't automatic.

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Replying to fawltybasil2575:
By JCresswellTax
28th Feb 2020 10:10

Basil I have a similar case and this reply is most helpful! Thank you.

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Replying to fawltybasil2575:
RLI
By lionofludesch
28th Feb 2020 10:15

Thanks, Basil.

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