Rental Income Joint Ownership

Fireraiser

I have been approached by a prospective client who has been receiving rental income for nearly 20 years. She has always had her income tax returns done by a local chartered accountant. In my initial consultation with her, I found that the property has always been jointly owned with her husband, but her husband has never filled in a tax return. She believed that, because the rent was paid to her, her husband did not need to fill in an SA.

Tax wise, I don't think HMRC have lost out as both partners have always been in full time employment and using their personal allowances fully. What concerns me is the possibility of penalties being due as the previous tax returns have been incorrectly completed. Does anyone have any experience of this sort of situation and am I worrying unnecessarily?

hunterhouse

Questions:

1) What is the legal form of ownership of each of the properties?
2) To the wife/client - why did the couple choose to have the rent paid to one of them and not both?
3) To the ACA - what do they believe was the reason the couple chose to have the rent paid to the wife only?
4) To the ACA - why did they treat the rental income as being solely that of the wife?
5) To yourself - what is the significance of the couple fully using their personal allowances?

Questions 3 and 4 may be difficult to ask directly or even ask at all.

Hunterhouse

T.C.

Good questions hunterhouse. Basically the legal ownership of the property is most relevant. Joint ownership = joint responsibility for tax purposes.

PGM

T.C. wrote: »

Good questions hunterhouse. Basically the legal ownership of the property is most relevant. Joint ownership = joint responsibility for tax purposes.

I've rented out jointly and it was owned jointly. Although I was under the impression ownership wasn't the key factor, as long as you could prove costs and income was being split as per the business agreement?

deanshepherd

Jointly owned marital assets must be split 50:50 unless you have made an election (in advance) to split them according to legal ownership. If legal ownership is 50:50 then you are stuck.

Fireraiser

PGM wrote: »

I've rented out jointly and it was owned jointly. Although I was under the impression ownership wasn't the key factor, as long as you could prove costs and income was being split as per the business agreement?

My understanding is that is true unless the partners are married or in a civil partnership.

To answer Hunterhouse;

1. I don't yet know for definite, but I expect joint tenancy as it is the default form of joint ownership. I don't even know if tenancy in common was an option 20 years ago.
2. The wife has always been self employed, so they just thought it was easier and would save them accountancy fees.
3 & 4 Potential client says ACA never asked. I haven't spoken to ACA yet.
5. It made sense when I typed it, but it was then end of a long day, so it doesn't make sense now on Monday morning

Fireraiser

Just had a conversation in principle with an HMRC contact technician. Their advice was, as there is unlikely to have been an overall tax loss, just declare the income jointly on future tax returns and everything will be OK. They can't guarantee that there won't be an investigation, but it is unlikely and any penalties are even more unlikely.

hunterhouse

I was just in the process of responding to TC's and PGM's replies but note deanshepherd has since replied. As usual, all make valid points and so there is nothing to be gained from further comments from myself.

The response of the HMRC contact technician is precisely what I expected and, the reason given by your client is one of the "acceptable" possibilities I had shortlisted.

One final point; in the event your client was inadvertently identified during the HMRC conversation and the unlikely does come to pass, it may be worth finding out what your client/clients did with the properties prior to their first tax return 20 years ago if they were owned them prior to this.

Hunterhouse