rental income, CGT and just a nightmare!

lori_3

hi folks

i'd be grateful if anyone can help me with a couple of queries as nothings ever simple is it?

I jointly own a property with my brother and we have received rental income for this for 6 years now. However, since the first year of declaring this, i've always put 100% of the rental income down to myself as I looked after the tenants and he worked away. In effect, i've taken all the profits and he has been happy to be a silent partner. Familes are good sometimes arent they?

Looking at his liability against mine to see whether i have reduced the overall tax liability for both of us is a little complicated as he's been out of the country at times, and currently is non resident in the UK. However, i think roughly it works out if a little in my favour - i did get investigated in 2002 for my tax affairs and thankfully nothing was found to be wrong - no one mentioned all the income being on my tax return being incorrect.

Anyway, i now have a buyer for the property and want to sell at the start of the next tax year - so am thinking of 7 April. There will be a large capital gain on the property which obviously i only want to declare half on on my return and pay!

I'm worried though that they may wonder where the other half is as the other capital gain wont be declared by my brother due to the non residency bit right now. As he hasnt paid tax on any rental income for 5 of these 6 rental years, will they assess the whole property and hence all CGT as being mine?

Any help gratefully received! Thanks lori

sarahlouise210

mmmmm... complicated! To start with .. the property is joint owned so you would only be liable for 50% CGT. The problems arise when they ask why you are now declaring 50% share and why your brother has not declared any of the income before. He would have been assessed as a non resident landlord. The end result may have been the same as you have paid 100% tax ..but you say you think you have been better off this way ?? HMRC would have to see if it was woth pursuing ..all you can do really is plead ignorance. Alternatively you could declare 100% for CGT..ask your brother to pay half..and hope that it all goes unnoticed! Once you ave sold the property that will be the end of it. Ahh it is a tangled web you weave!

lori_3

Thanks for the response Sarahlouise! I genuinely didnt realise until recently that I was doing wrong by putting all the rental income as mine as thats what my accountant advised years ago! I realise that for a couple of years my brother could have gotten non resident landlord status but for the other few he was a 40% payer and I was 22% so looking back roughly, overall the tax liability is within a few hundred pounds - probably in my favour.

I definately dont want to pay 100% CGT on the property in april as currently as a non resident he doesnt have to pay his half and I am a 40% payer now - on a potential gain of 35K that makes a hell of a tax difference!

I think the worst scenario is that they will see ive allocated the rental profits incorrectly and ask for the back tax if any - its more the whole nightmare of searching through back records etc i dont need after having done this once! Being investigated was not a nice feeling.

On another note, I calculate i wont be paying/filling in a tax return for this until Jan 08 - is this right? It is a long time to wonder if ive done things right if so . Do you know when the time limit expires for the tax office to look into your affairs? Someone said that this was only 22 months after the end of the tax year for personal returns (which mine is, not a business)?

Thanks again
Lori

Bordera

Lori, take care as it sounds as if your brother may have only been temporarily non resident from the description you give, in which case he may be liable to capital gains tax. Not being resident at the time the disposal is made is NOT enough to exempt him.

To be exempt from GCT your brother would have to be non resident and non ordinarily resident in the UK for 5 full tax years (not 5 years from the date he first left). If he was partly resident or ordinarily resident for 4 out of 7 years then he is likely to be liable.

I'd recommend using the questions on the help sheets from the self assesment return to work out your brother's residency and ordinary residency status.

lori_3

thanks for the response - yes the IR told me as long as he stays out of the country another 4 years there is no CGT to pay but if he returns in the period he will be liable. I feel much better regarding the rental income though as apparently it is allowed to split this in differing proportions to that which is legally owned if both parties agree. So, hopefully im all sorted for fingers crossed for the sale!

Thanks everyone!

Cook_County

Lori - I don't think you are quite right on how to split the income.

You can declare the actual proportions of jointly ownership if the property is owned in unequal proportions and a form 17 is filed. However the form 17 cannot be backdated and the income can't be split in any old proportions, it has to reflect the actual underlying ownership.

A different route might be to look at the beneficial ownership if this is different from what the paperwork seems to say. It is quite common for example for parents to be listed as owning property for minor children even though the child is actually the beneficial owner.

So if the property was in reality 100% yours from day 1 but your brother got added to the deeds just to satisfy say the mortgage lender but never participated, paid any expenses or received any money you might have an argument.

You'd probably want to discuss this with your solicitor.

lori_3

thanks! And yes i think its the beneficial owner part of this that applies - hes never received any profit or paid anything since we took this property over, in fact the tenants dont even know who he is! I did ring the IR helpline and they seemed to think it was ok for all income therefore to be put on my tax form - they seemed more concerned it was being taxed somewhere than at what rates/amounts. However, i see your point so will definately discuss with the solicitor involved - thanks for your help again.

Regards lori