8 minute read.
The appellant was taxable on 50% of rental profits from a property jointly owned with her husband, notwithstanding that all the net rents were paid to and retained by him.
Summary
The appellant was taxable on 50% of rental profits from a property jointly owned with her husband, notwithstanding that all the net rents were paid to and retained by him.
Background
The appellant took over the tenancy of a flat (BH) from her mother. Following her marriage, the appellant and her husband became joint tenants. They lived at BH from 1988. In 1996, the couple bought a leasehold interest in BH from the council. They continued living there until June 1997, when they moved to a house. BH was let out.
In 2006, the couple decided to separate. Her husband transferred his interest in BH to the appellant in December 2006. However, the appellant lived at the house with her husband and children until she moved out in around 2010. A decree of divorce was given in October 2011.
After leaving the house, the appellant rented another property and retained that tenancy until November 2012. BH was let out for most of the tenancy period. BH became the appellant’s main residence on or around 1 October 2012. The appellant completed on the sale of BH on 8 November 2012.
During the period of joint ownership (and some of the period of the appellant’s sole ownership), all the arrangements for the letting of BH were undertaken by her husband, who exercised unfettered exclusive control of the letting. From June 1997, while the husband managed the letting, the net rents were paid to and retained by him.
The appellant did not notify HM Revenue and Customs (HMRC) of her chargeability to tax until 2008/09. In March 2016, HMRC issued assessments (under TMA 1970, s 29) for the tax years 1997/98 to 2004/05, and 2008/09 to 2011/12. In addition, following an enquiry into the appellant’s tax return for 2012/13, HMRC amended her self-assessment to include rental income in respect of BH. The appellant appealed.
For the tax years 1997/98 to 2004/05, HMRC treated 50% of the net taxable profit as the appellant’s taxable income, but she argued that all the income had been received by her husband. For the tax years 2008/09 to 2009/10, HMRC treated the appellant as taxable on 100% of the net income, but she argued that she should not be taxable on that income because it had all been received by her husband.
Decision
The First-tier Tribunal (FTT) firstly considered HMRC’s attribution of 50% of the net income from BH to the appellant between 1997/08 and 2007/08. The FTT found on the evidence that the appellant and her husband were not separated (within ICTA 1988, s 282) until 2010.
The FTT concluded on the evidence that for the period 1997/08 to 2004/05, the law on jointly held property (TA 1988, ss 282A-282B) required 50% of the net income from BH to be treated as the appellant’s taxable income.
For the period after December 2006 (when the appellant was the sole proprietor of the leasehold interest of BH), the FTT considered that if the appellant had beneficially received income from the letting of BH it would unquestionably have formed part of her taxable income. However, the FTT concluded that up to 2008/09, the appellant’s husband received and had control over the income from the flat (but that thereafter it accrued to her).
The FTT accepted the appellant’s evidence that she found her husband controlling and abusive, and that she did not voluntarily consent to his retention of the net profits.
The FTT considered it very unlikely that the appellant could have recovered the debt due from her husband in full. In the FTT’s opinion, a prudent accountant would have made a provision of at least 80% of the amount of the net profits due from the appellant’s husband. The FTT, therefore, concluded that in the period 2006/07 to 2008/09, only 20% of the calculated net return from the letting of BH was taxable profit of the appellant.
Note: the appeal also considered other grounds including capital gains tax on the disposal of BH and penalties.
Comment
The legislation on jointly held property in TA 1988, ss 282A-282B was rewritten with effect from 6 April 2007; for the current version, see ITA 2007, ss 836-837.
Akan v Revenue and Customs [2018] UKFTT 0268 (TC)
