Rental income tax

pavvers

I have been pointed in the direction of this part of the forum following a thread I created in the mortgages section.  I will sum it up here, but if anyone has the time or inclination to read the original thread, it is this one:

https://forums.moneysavingexpert.com/discussion/6509644/btl-remortgage-predicament

So the situation is that my dad and I co-own a single buy-to-let property (ourselves, not through a company).  Having been steered towards dong some research I have found the following info elsewhere on the net:

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

https://www.accountingweb.co.uk/any-answers/rental-income-share-between-two-people-who-live-together

https://www.taxinsider.co.uk/jointlyowned-property-and-rental-income-whose-is-it

I believe that the information found in the above means that my dad and I can split the rental income from the house in any proportion we choose.  The ratio we have agreed is that he takes 100% and I take 0%.

Question 1 is hopefully nice and simple - is my belief correct?

We have agreed the above split because my dad is a basic rate tax payer and I am a higher rate.  Question 2 is what are the implications of my dad gifting me an amount of money?  Arguably it could be any amount of money, but for the sake of this scenario, the amount is equal to half of the remaining net profit after the mortgage has been paid.  To put some numbers on it:

Rent is £1000pm Gross
20% tax paid on that amount by my dad leaves £800
£312 mortgage payment leaves £488
50% of this is £244 which is the amount he gifts me

We are expecting our mortgage payment to increase significantly soon as our 5 year fixed rate deal is coming to an end and as I'm sure you are aware, interest rates are higher now than 5 years ago.  As a result of this, the amount remaining is going to drop from £488 to an amount that is probably not worth splitting anyway.  However I would still like to know what the rules are around gifting.  Someone in my original thread mentioned "settlement rules" so I would like further information on that if it is applicable.

Thank you in advance

sheramber

Do you own the house as joint oemnwers or as teneant in common?

If tennent in common what are you indicidual shaers?

pavvers

[Deleted User] said:

Yes, this is the sort of thing that the settlements legislation is aimed at.  You'd be taxed on part of the rental income even though your dad received it.

Have a look at HMRC's manuals - this would be a good starting point: https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4005 and the index to the section is here: https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4000

That was quick!  Thank you, I will have a read

pavvers

sheramber said:

Do you own the house as joint oemnwers or as teneant in common?

If tennent in common what are you indicidual shaers?

Joint tenants.  But my interpretation is that that does not matter?  For married couples it does, but not for a father and son relationship. 

pavvers

pavvers said:

[Deleted User] said:

Yes, this is the sort of thing that the settlements legislation is aimed at.  You'd be taxed on part of the rental income even though your dad received it.

Have a look at HMRC's manuals - this would be a good starting point: https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4005 and the index to the section is here: https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4000

That was quick!  Thank you, I will have a read

I've given it a go, but it's all way too wordy for me unfortunately!  The examples given revolve around shares in a company - maybe that doesn't make any difference and the same logic can be applied but even so, I find it hard to follow.  There is also a lot of emphasis on married couples which definitely does not apply but not much explanation given to an unmarried pair of people to demonstrate the difference.

However, from your own actual answer I am going to assume that my dad cannot gift me back any amount of the rent that he has received.  Not without me incurring an income tax liability anyway, which negates the purpose of doing it.
Your reply does indicate to me though that the answer to my first question is yes, we can split the rental income at any ratio we choose?

pavvers

[Deleted User] said:

The examples in HMRC's manuals are just meant to be illustrative rather than comprehensive.

There is a lot of emphasis on married couple because there is specific legislation that tweaks the normal settlements rules and there tend to be plenty of opportunities for married couples to come up with ideas that fall on the right or wrong side of the line.  There's also specific rules for unmarried children under age 18 and so there's more stuff on that too.

There's nothing magic about property income vs dividend income.

The big picture for me though is (i) you've done something that you wouldn't have done for a random stranger (e.g. you wouldn't let me have 100% of the income if I'd only paid for a smaller proportion of the purchase price), (ii) income arises to someone else (i.e. your dad), (iii) there's some sort of arrangement (however informal and subject to whatever conditions and caveats) where some of that income might get paid to you.  It would be your responsibility to report the income on your self-assessment tax return.  Sometimes, people say that there was no arrangement and that their dad just happened to gift them that income.  If I put aside some of the qualms that people often have of evading tax, if HMRC ever look at it that they will have the benefit of hindsight and see that the payments have actually been made to you.

In relation to your first question, I don't have any practical experience of that but your reference to https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030 seems clear.

Thank you for putting it in layman's terms for me, much appreciated!  Might I suggest you change your username to "Not_as_complicated_as_that"

Back to question one, yes, I agree it does seem clear but I had a number of people telling me that I was wrong prior to sourcing that information.  But I personally am satisfied with my understanding so I will leave it at that.

Thank you again 

sheramber

pavvers said:

[Deleted User] said:

The examples in HMRC's manuals are just meant to be illustrative rather than comprehensive.

There is a lot of emphasis on married couple because there is specific legislation that tweaks the normal settlements rules and there tend to be plenty of opportunities for married couples to come up with ideas that fall on the right or wrong side of the line.  There's also specific rules for unmarried children under age 18 and so there's more stuff on that too.

There's nothing magic about property income vs dividend income.

The big picture for me though is (i) you've done something that you wouldn't have done for a random stranger (e.g. you wouldn't let me have 100% of the income if I'd only paid for a smaller proportion of the purchase price), (ii) income arises to someone else (i.e. your dad), (iii) there's some sort of arrangement (however informal and subject to whatever conditions and caveats) where some of that income might get paid to you.  It would be your responsibility to report the income on your self-assessment tax return.  Sometimes, people say that there was no arrangement and that their dad just happened to gift them that income.  If I put aside some of the qualms that people often have of evading tax, if HMRC ever look at it that they will have the benefit of hindsight and see that the payments have actually been made to you.

In relation to your first question, I don't have any practical experience of that but your reference to https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030 seems clear.

Thank you for putting it in layman's terms for me, much appreciated!  Might I suggest you change your username to "Not_as_complicated_as_that"

Back to question one, yes, I agree it does seem clear but I had a number of people telling me that I was wrong prior to sourcing that information.  But I personally am satisfied with my understanding so I will leave it at that.

Thank you again 

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-case-studies#:~:text=The tax rules say that,and taxed on that basis.Tax implications for jointly-owned property - but not by spouses or civil partner

Where you receive income from property in the UK, that income is taxed as part of the profits of your property rental business.

In a straightforward case where you own a property jointly with another person (for example, friends, business partners, parent and child or brother and sister) and the property is let out, your share of the rental profits or losses will usually be based on the share of the property you own. Unless you agree a different allocation - this is explained further below.

.........................................

pavvers

sheramber said:

Where you receive income from property in the UK, that income is taxed as part of the profits of your property rental business.

In a straightforward case where you own a property jointly with another person (for example, friends, business partners, parent and child or brother and sister) and the property is let out, your share of the rental profits or losses will usually be based on the share of the property you own. Unless you agree a different allocation - this is explained further below.

I hadn't seen that page but it seems conveniently vague to me - the bits in bold being what I'm referring to.  The last line in particular suggests that the bit that will be explained further below will give details on the occasion where a different allocation is agreed.  The only example they give is a 60:40 split between two friends which falls under the heading of "usually" anyway - everyone knows what the word "usually" means.  There is no example given of the different allocation which would be a lot more useful, at least to me.

Not criticising you, it's the article which is the problem!  It does have a heading of "Guidance" at the very top though so perhaps they are hoping that people will make their own judgements.

pavvers

I've found something else via the TSEM4005 manuals linked above - some guidance as to whether it applies would be appreciated:

https://www.gov.uk/government/publications/trusts-and-settlements-income-treated-as-the-settlors-hs270-self-assessment-helpsheet/hs270-trusts-and-settlements-income-treated-as-the-settlors-2023

2.6 The exceptions — situations where you do not keep an interest

There are a number of circumstances where you’re not treated as keeping an interest in the property of a trust or settlement you’ve made. These are:

• making an outright gift of money to another person with no strings attached; in other words you give up any rights or control over that money — the person receiving the gift may choose of their own accord to give the money back to you but you’re not treated as keeping an interest in that money — this is because that other person has complete freedom to do what they want with that money

2.7 Example 6

Dawn gives her daughter Jane a sum of money because her business is doing well. Jane can do as she pleases with this money. A few years later Dawn’s business is suffering and Jane decides to give back a large part of the money. The original gift was not a loan and there was never any understanding it would be paid back. Although part of the original gift has since been used by Jane to fund her gift to her mother, Dawn has not kept an interest in the property.

The potential technicality here is that I have not given my dad any money directly.  I've allowed him to take rental income which could have come to me, but he has intercepted it before it got to me due to our agreement on the ratio of rental income.  What I'm getting at is, if I gave my dad £100 from my own money, be it savings or from my employment income and did not expect to get it back, I am fully aware that the above example says that he can give me some or all of it back at anytime if he so chooses.  Once I gave it to him, it became his money.  Is there a difference between that, and me giving him my share of the rental income before I have received it?  Once it's in his hands, it is his to do whatever he wishes with.  I might be splitting hairs here, I really don't know!

Grumpy_chap

pavvers said:

my dad and I co-own a single buy-to-let property (ourselves, not through a company).  

my dad and I can split the rental income from the house in any proportion we choose.  The ratio we have agreed is that he takes 100% and I take 0%.

We have agreed the above split because my dad is a basic rate tax payer and I am a higher rate.  Question 2 is what are the implications of my dad gifting me an amount of money?  Arguably it could be any amount of money, but for the sake of this scenario, the amount is equal to half of the remaining net profit after the mortgage has been paid.  

It seems clear that is an unnatural arrangement contrived solely for the purpose of reducing liability to taxation.
Is that tax avoidance - exploiting a loophole?
Is that tax evasion - concealing income or information?
(https://informi.co.uk/finance/tax-evasion-v-tax-avoidance-essential-information-for-start-ups#:~:text=Tax evasion means concealing income,how much tax you owe.)

I would suggest that the arrangement proposed is nearer to tax evasion than tax avoidance.  
The property is owned 50-50.
The income would ordinarily default to 50-50
The variance from default does not appear to be genuine, as Dad gets the 100% but is then obligated to "gift" 50% back to the Son.

Any average person and, I suspect, the HMRC looking at that would see the arrangement for what it is - concealing the son's true income.

BoGoF

Add in to the mix it was previously 50:50 and the sole reason you changed it was to avoid HR tax on your share. Clearly a contrived arrangement.