Rental income tax

pavvers

OK, thank you all, I have been educated. 
If I pay the money back to my dad, including the negligible amount of interest that I have earned; is that a satisfactory way of setting everything straight again?
I have always kept the money in a separate account so any transactions to and from it are easy to identify.
Not that it makes a difference now, but the rent hasn't always been £1000pm, prior to July '23 it was £900 and prior to May '20* it was £830.

*I remember that because the tenant had to move in during lockdown. Previous tenants left in December 19' so we had 4 months of zero income.

pavvers

I feel obliged to go deeper into my personal finances to put perspective on things..

The house that I live in is a renovation project.  When I bought it, I got the largest mortgage that my employment income would allow so that there was a surplus of money available to carry out work - around £40k.  The vast majority of work that has been done has been funded from that £40k and from my salary.
Money that I have received from my dad genuinely has been going into a separate account.  Yes, I have had to "dip into" it on occasion to buy materials or pay a tradesman. I hasten to add that these occasions really have been few and far between.  The last time was at least 18 months ago.  Spending on my house has reduced significantly and I'm now in a position where I could replenish any money that I've taken from that account and am more than happy to return it all to my dad.  I really have no issue with what I might consider as "my" money sitting in his bank account.  We have a great relationship and I don't anticipate him going to Vegas anytime soon and putting it all on red.  If he does then I'd obviously feel a bit miffed, but I'd have to live with it.
If I return the money, would that be deemed enough to undo the settlement legislation that I have inadvertently triggered?

Jeremy535897

The income from a single rental property owned by two people as joint tenants in England is always treated as split 50:50 between the owners, unless:
1. There is a genuine partnership between the owners rather than just shared ownership of a property (most unlikely unless there was a proper property rental business with several properties, so I don't agree with example 4 and the 3 sister situation); or
2. The capital was provided by one of the joint tenants, and for one reason or another, the property was put in joint names, but the reality is that the property is held on a bare trust for the contributing co-owner. This does not seem to be the case (no bare trustee would be on a mortgage, but see below).

To clear up some misconceptions:
1. The settlements legislation is not in point, because HMRC don't need it. They will expect the rental income to be taxed 50:50, anything else declared is an error, and if the net rent isn't received 50:50, there is a modest gift for inheritance tax purposes from one party to the other (probably covered by the normal expenditure out of income exemption). The settlements legislation could be in point if the situation was that you formally assigned the income from the rental property to your father in circumstances where he did not own any of the property. It would not be in point if you were in partnership, as HMRC do not argue that it applies to divisions of partnership profit share (the 3 sister example is right about this point).
2. No lender will ever lend to one co-owner on a jointly held property. It is nothing to do with what you declare on a tax return. It means they could have real trouble repossessing it.
If you want your father to be taxed on all the income from the property, he needs to wholly own it.

Jeremy535897

[Deleted User] said:

Jeremy535897 said:

The income from a single rental property owned by two people as joint tenants in England is always treated as split 50:50 between the owners, unless:
1. There is a genuine partnership between the owners rather than just shared ownership of a property (most unlikely unless there was a proper property rental business with several properties, so I don't agree with example 4 and the 3 sister situation); or
2. The capital was provided by one of the joint tenants, and for one reason or another, the property was put in joint names, but the reality is that the property is held on a bare trust for the contributing co-owner. This does not seem to be the case (no bare trustee would be on a mortgage, but see below).

As I said earlier, I know nothing about property law but HMRC seem to believe something else: https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

Jointly owned property: no partnership

Where there is no partnership, the share of any profit or loss arising from 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

If that is true (i.e. that under property law you can decide on how income is allocated) then that will impact your comments on settlements.

I confess I don't know where this idea comes from, but if HMRC thought the settlement provisions could apply, there would surely be mention of it in PIM1030. 

Jeremy535897

I can find nothing to support PIM1030's assertion that "occasionally" rental income arising on non partnership jointly owned property can be divided as the joint owners want rather than as the underlying beneficial interest requires. I mentioned the situation where there is effectively a bare trust, but just arbitrarily dividing income between joint owners on a varying basis year by year is something I would only expect to see in a partnership. For some discussion (albeit a husband and wife situation), see:
https://community.hmrc.gov.uk/customerforums/ifp/0314c6f2-adaf-ee11-a81c-002248004b84
Tax Insider is more bullish, at:
https://www.taxinsider.co.uk/how-to-jointly-own-a-property-5050-but-split-rental-income-9010
but seems to overlook the use of the word "occasionally" in PIM1030 (which itself is only HMRC's interpretation of the law, and may be wrong).

Jeremy535897

[Deleted User] said:

Jeremy535897 said:

I can find nothing to support PIM1030's assertion that "occasionally" rental income arising on non partnership jointly owned property can be divided as the joint owners want rather than as the underlying beneficial interest requires. 

I've not looked into it but my guess is this is something that comes from case law that is a hundred or more years old. If I was going to look into it then I'd start with LPA25 to see if that hinted at it and then look at the case law around property and the rights of owners. It might be that this was relevant where two people owned the property but one of the owners did more than others and there was no partnership.  If that's the case then it might be worth looking at an online (ie out of copy right) addition of Lindley & Banks.

As an aside, I do remember a tax avoidance scheme from the early 1990s that purported to avoid a BiK on accommodation by having the employee acquire a small ownership right. Apparently owning a bit of the property gave the employee the legal ability to occupy the whole (presumably with the agreement of the other owner, eg an EBT). If this was litigated the SCD may give some clue as to the property law rights. 

It's an interesting possibility. I am sure the author of PIM1030 must have had something in mind, but the use of "occasionally" suggests it's rather more obscure than a couple of co-owners sitting down and arbitrarily allocating income amongst themselves.
The settlements legislation is a complex area, but HMRC are nervous about using it in simple transactions. About 40 years ago, I remember an attack on dividend waivers. If the company could legally declare a maximum dividend of £1,000, and then 1% of the shareholders received the £1,000 because the other 99% waived, HMRC's approach was that there had to be an "arrangement," because the company couldn't have declared the dividend without the waivers in place, because it had insufficient reserves. Technically, almost anything could be caught, probably even simple husband wife trading partnership cases, but HMRC don't choose to take the point, perhaps because they think most judges would bend over backwards to find a way to rule against them.

Jeremy535897

This reflects my understanding:

When is there a property partnership?

The letting of a jointly-owned property in itself does not give rise to a partnership – and indeed a partnership is unlikely to exist where joint owners simply let a property that they own together. Whether there is a partnership depends on the degree of business activity involved and there needs to be a degree of organisation similar to that in a commercial business. Thus, for there to be a partnership where property is jointly owned, the owners will need to provide significant additional services in return for money.

https://pro-taxman.co.uk/the-letting-of-a-jointly-owned-property-in-itself-does-not-give-rise-to-a-partnership-so-what-does/

The Partnership Act 1890 talks about co-ownership in section 2:

https://www.legislation.gov.uk/ukpga/Vict/53-54/39/section/2?view=plain

That does not explain why PIM1030 says that co-ownership may "occasionally" allow the co-owners to divide profits as they wish, even in the absence of a partnership. When I asked chatGPT if UK resident co-owners of a UK resident let property could share rental profits differently to ownership percentages, it said:

"Yes, in the UK, co-owners of a rented property can agree to share rental profits in proportions that differ from their ownership shares. The ownership share typically determines each co-owner's entitlement to the property's capital value, but the distribution of rental income can be customized through a legal agreement.

Co-owners can formalize their arrangement through a deed of trust or a co-ownership agreement. This document should outline the specific terms regarding the distribution of rental income, including the agreed-upon proportions or percentages. It's advisable to consult with legal professionals, such as solicitors or conveyancers, to ensure that the agreement is legally binding and accurately reflects the intentions of all parties involved.

Keep in mind that any changes to the distribution of rental income should be agreed upon and documented to avoid misunderstandings or disputes in the future. Additionally, tax implications should be considered, and co-owners may want to seek advice from a tax advisor to ensure compliance with relevant tax laws."

Asked for the statute or case law to support this, it said:

"I'm not a legal expert, and my responses are based on general knowledge. For specific legal advice, it's crucial to consult with a qualified legal professional who can provide guidance tailored to your situation.

In the context of co-ownership of rented property in the UK, the ability to customize the distribution of rental income is often based on the legal principle of freedom of contract. This principle allows parties to enter into agreements that reflect their intentions, as long as those agreements are not contrary to law or public policy.

While there might not be a specific statute or case law explicitly addressing the distribution of rental income among co-owners, the general principles of contract law and property law are relevant. Legal documents such as deeds of trust or co-ownership agreements play a crucial role in defining the rights and obligations of co-owners."

Carl Bayley says:

"Joint owners who are not a legally married couple may agree to share rental income in different proportions to their legal ownership of the property (perhaps because one of the investors is carrying out the management of the jointly held portfolio). The Income Tax treatment should follow the agreed profit sharing arrangements. It is wise to document your profit sharing agreement in order to avoid any dispute, however."

https://www.taxcafe.co.uk/resources/letsgettogether.html

I suggest the following conclusions:

1. Where there is a partnership, as opposed to mere co-ownership, partners may allocate rental profits as they choose between the partners, and HMRC appears unwilling to try to apply the settlement provisions to partnerships

2. Where there is mere co-ownership, it still appears to be possible to share rental profits in a different ratio to ownership, but if there is not a good reason for it (like one co-owner doing all the management), maybe HMRC could look at using the settlement provisions if there is an element of bounty?

3. Where rental profits are allocated unequally purely for tax purposes, with a compensatory payment made between the parties, theoretically HMRC could look at the GAAR, but it's a sledgehammer to crack a nut.

mybestattempt

There is no partnership here.

The income is rent from UK land and property and the legislation which applies is contained in the Income Tax (Trading and Other Income) Act 2005.

The property is jointly owned by father and son, each legally and beneficially own 50% of the property.

As they are not a married or civil partnership couple they cannot make a declaration of unequal shares of beneficial ownership (sections 836 and 837 of the Income Tax Act 2007) and be taxed on unequal shares of the rental income.

Absent a deed of trust declaring unequal shares in the property each is entitled to 50% of the income and thus each is liable to tax individually on his 50% share.

Even if the son has unfettered access to all the income as long as the father retains 50% ownership of the property then he remains taxable on 50% of the income.

mybestattempt

I can't post any links but the HMRC Trusts, Estates and Settlements Manual from TESM 9000 onwards explains the legal background about joint property ownership and income tax.

Jeremy535897

mybestattempt said:

I can't post any links but the HMRC Trusts, Estates and Settlements Manual from TESM 9000 onwards explains the legal background about joint property ownership and income tax.

HMRC's examples in TESM on property all focus on sole ownership cases where someone is trying to divert income to someone else, which suggests that they aren't really sure themselves.