Rental property in joint names - The Book-keepers Forum (UK)

Meadowlands · Senior Member

Rental property in joint names

HellsBells · Veteran Member

Hi. I don't know the answer but found this (while looking for something else). It doesn't quite seem the same as your client's circumstances but does seem to suggest that if they can prove that they don't own equally, it can sometimes be split differently?

Hel

www.hmrc.gov.uk/forms/form17.pdf

RobH · Expert

I personally disagree with the advice too and I think you are right to question this.

The default position for property held between married couples is a 50:50 split even if the actual ownership is different. There is a form (17) whereby they can elect to have the property taxed in proportion of ownership but I would presume that they would need to see a solicitor to get the ownership split. I wonder if when they come to sell the property the accountant will say the husband isn't allowed his annual allowance for CGT?!

As for them saying this is her job, well that's a complete nonsense unless they have created a company and she is being paid a salary under PAYE. I do however agree that 'this could be challenged by HMRC'!

HellsBells · Veteran Member

Rob, we posted at same time but I don't know the right answer.

Hel

RobH · Expert

Hi Hel,
That is actually form 17 that I mention. I don't think it can be elected retrospectively and if they want to change the percentages they would need consent from any mortgagor which no doubt would incur fees and a solicitor. Given that losses have been made it would have been quite simple to do the husband's tax return. It also makes me question whether all the losses can be carried forward now? Anyway that's my understanding of it but perhaps I have it wrong and will be eating humble pie!

Meadowlands · Senior Member

thanks Hel & RobH

This is what I thought - I had asked my accountant about splitting and he said you had to change the ownership on your mortgage etc. I don't really understand why they were advised not to do the tax return - it wouldn't have been onerous. Anyway this one won;t need doing until the end of this tax year which gives me time to figure it out.

YLB-HO · Guru

I was told by someone I knew, that because he paid the mortgage (joint names), the rental income had to be his for tax purposes. His wife has no income from any source, and the rental income did not cover the mortgage. However I did point out that it could be viewed as 100% her income on the grounds she had no income. (Sorry rob, I disagree most of your comments)

It also is none of the mortgagers business how the property is divided. I have clients with trusts (and charges), which mortgage companies know nothing, which specify the divide property ownership in the even of a dispute/sale/death etc.

Another client has a property they own 50/50 with their sister. There name is on the mortgage, because they wanted their name on the property. They however do not pay towards the mortgage as they put 50% of the purchase price in as cash from their own funds, and their sister put the other 50% as the mortgage.

In my early days of doing tax investigation work, I had a client who was investigated because the tax inspector couldn't understand how my client could afford to buy a property (which the inspector could not buy), when my clients taxable income was far lower than theirs. (The tax inspector actually lost their job over this). The client actually had a private agreement with a friend (single sheet of paper agreement between them) from someone who "lent" them 50% of the cash required to purchase the property, in exchange for 50% of the sale price of the property when it was later sold. They were doing nothing illegal, the lender was not informed, and the property was registered only in my clients name.

js_003 · Member

Hi,

The legal options have been availed and as per terms they have to pay interest and rent arrears.Now is the time to decide where and how to claim the rent.

****Sorry not relevant for this topic,posted by error****

-- Edited by js_003 on Wednesday 17th of September 2014 03:29:27 PM

YLB-HO · Guru

RobH wrote:
As for them saying this is her job, well that's a complete nonsense unless they have created a company and she is being paid a salary under PAYE. I do however agree that 'this could be challenged by HMRC'!

I do a lot of rental accounts. One client I have has 36+ properties, which they manage themselves. So you cannot argue its not a full-time job! He keeps asking if he could have a salary and put it through as a business expenses, but I keep telling him he can't as its his income but its still viewed by HMRC as investment income, not self-employment. They have no other income from any source. No Ltd company or salary. You don't need either to have a job. I did suggest he form a Ltd company to manage the properties, but he does not want to pay the extra fees, which a Ltd company would require.

RobH · Expert

YLB-HO wrote:
I was told by someone I knew, that because he paid the mortgage (joint names), the rental income had to be his for tax purposes. His wife has no income from any source, and the rental income did not cover the mortgage. However I did point out that it could be viewed as 100% her income on the grounds she had no income. (Sorry rob, I disagree most of your comments)

It also is none of the mortgagers business how the property is divided. I have clients with trusts (and charges), which mortgage companies know nothing, which specify the divide property ownership in the even of a dispute/sale/death etc.

Hi Frauke,

I'm pretty sure that properties jointly owned by married couples will have a default position of income being split 50:50 even when share ownership is unequal. Here's the HMRC link:

http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM9814.htm

I'm surprised to learn that mortgagors are happy for mortgagees to divide properties up how they want. I would have thought they would not allow this given they have a hold on the property if there is a default of payment, so I apologise if I jumped to the wrong conclusion.

RobH · Expert

YLB-HO wrote:
RobH wrote:
As for them saying this is her job, well that's a complete nonsense unless they have created a company and she is being paid a salary under PAYE. I do however agree that 'this could be challenged by HMRC'!

I do a lot of rental accounts. One client I have has 36+ properties, which they manage themselves. So you cannot argue its not a full-time job! He keeps asking if he could have a salary and put it through as a business expenses, but I keep telling him he can't as its his income but its still viewed by HMRC as investment income, not self-employment. They have no other income from any source. No Ltd company or salary. You don't need either to have a job. I did suggest he form a Ltd company to manage the properties, but he does not want to pay the extra fees, which a Ltd company would require.

I'm not arguing that running 36 properties isn't a full time occupation, however the OP is only talking about one property, so it's not quite the same thing. However it still comes down to the fact that the default position is 50:50 and just by saying it's a job does not mean all the income can be allocated to one person.

Amanda · Expert

Hi

I own a few properties with hubby and rent them out, on my first property I actually rang HMRC about it and asked the question and because we both owned the property and had a joint mortgage on it I was told it had to be 50:50, we checked with the Solicitor and an accountant and they confirmed what HMRC said. It was an agent that told us we could have it just in my name! I didn't think it sounded right so did my own investigation, good job I did!

If you form a Ltd company then that is different. We haven't formed a Ltd co as it wasn't worth it. If we add to our portfolio later own then maybe it might be worth it.

If the rules have changed then I am happy to be corrected.

RobH · Expert

Thanks for that corroboration Amanda, I started to doubt myself!

Meadowlands · Senior Member

Thanks everyone I have been doing a bit more research and this is what I have come up with.

There are 2 ways to own a property in joint names, Joint tenants and Tenants in common.

Joint tenants are deemed to own equal shares where as tenants in common can have varying shares. There is also a difference on splitting depending on whether or not the owners are married. If they are married then it is automatically assumed that there is a 50:50 allocation. Married couples and civil partners usually own a property as joint tenants giving equal rights over the property such that should 1 owner die the other automatically becomes sole owner, whatever may be stated in a will. If they want to split income in any other proportion a Declaration of Trust must be signed and then within 60 days of the signing HMRC form 17 must be submitted, otherwise the declaration has no effect.

It is possible to change to a tenancy in common and therefore the proportions of ownership. A solicitor could advise and if there is a mortgage, permission may be required from the lender. A change to split ownership is a part disposal for the purposes of CGT. The owner whose share is reduced will be deemed to have sole that proportion of their interest in the property at market value and therefore liable for tax on the seemed gain, that is unless they are married where changes in ownership are treated as creating neither a gain nor a loss.

It may make sense to split the ownership if one of the couple pays higher rate tax but beware that if they split up then they would only be entitled to the proportion they own, also if tenants in common then you can will your portion of a property to someone else but not if you are married and its joint tenancy.

So in answer to my question I was right to be concerned that this advice wasn't correct, as far as I am aware they are joint tenants so it should have been split 50:50 and i can't see any benefit in them not having done so other than saving the fee for the SA. This was the advice I had been given so it looks like RobH you were right as well.

Now just to inform the client!

Thanks everyone

RobH · Expert

Thanks Alison, that's good to know. Seems the mortgage lender probably ought to be informed too which seemed logical.

Meadowlands · Senior Member

I agree - they tend to get a bit grumpy if you change things like ownership, rent the house etc without telling them. When we rented our house out we didn't have to change to a BTL as it was a military move but every time I called them and then mentioned it was rented I heard a deep intake of breath as they thought I had dropped myself in it - until they read the file!

RobH · Expert

They saw 'military' and thought you might have a gun!

Meadowlands · Senior Member

no due to budget cuts we are left with shouting loudly and waving out arms!

RobH · Expert

biggrin that sounds about right!

Amanda · Expert

We talked about Joint tenancy and tenants in common and it really does depend on who has put the most down especially if you are going into it with a friend and not a spouse, which some people do joint ventures with friends.

If they are hubby and wife and have jointly put down a deposit and are jointly on the mortgage then it is 50:50. Our solicitor said if we had put down ours any other way it would have been fraud!

This is a subject close to my heart as it affects us personally so really did do a lot of research on it.

Also make sure they have a 'Will' set up otherwise if hubby and wife die in a car accident together the whole process of leaving your houses to your kids will become messy.

HTH

Meadowlands · Senior Member

thanks Amanda

YLB-HO · Guru

RobH wrote:
YLB-HO wrote:
I was told by someone I knew, that because he paid the mortgage (joint names), the rental income had to be his for tax purposes. His wife has no income from any source, and the rental income did not cover the mortgage. However I did point out that it could be viewed as 100% her income on the grounds she had no income. (Sorry rob, I disagree most of your comments)

It also is none of the mortgagers business how the property is divided. I have clients with trusts (and charges), which mortgage companies know nothing, which specify the divide property ownership in the even of a dispute/sale/death etc.

Hi Frauke,

I'm pretty sure that properties jointly owned by married couples will have a default position of income being split 50:50 even when share ownership is unequal. Here's the HMRC link:
http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM9814.htm
I'm surprised to learn that mortgagors are happy for mortgagees to divide properties up how they want. I would have thought they would not allow this given they have a hold on the property if there is a default of payment, so I apologise if I jumped to the wrong conclusion.

Why should mortgagors care how a property is divided up? What difference does it make to them?

The division only makes a difference when a property is sold or to do with rental income. That's is the drawback with dividing it up not according to the mortgage. If a property is say divided 50/50 with someone not mentioned on the mortgage, then if the mortgage goes into default, it will automatically get paid off first from the proceeds from the sale, and then if anything is left the balance gets paid to the person whose name its in. Its then up to the other person to get their share from them.

By the way, I presume you know that there is nothing in tax law that states that a company director has to complete a tax return every year. However the HMRC claim that all directors have to complete a tax return. Going by the number of tribunal cases the HMRC are losing, you cannot automatically accept what they tell you, unless it is backed up in law. (Manuals are just guidelines to help them and us, and not actually law, which is why they not be followed blindly).

I have taken 3 tax cases to tribunal in the last 2 years, and the HMRC gave in on all 3 immediately before the hearings.

-- Edited by YLB-HO on Thursday 18th of September 2014 07:42:21 PM

RobH · Expert

Hi Frauke,

I would think the mortgagors have a vested interest in whose name the property is in maybe we should ask a mortgage broker for clarification?

Yes I did know that company directors do not have to complete a self assessment (unless of course one has been sent to them) but I'm not sure what that has to do with fact that under tax law the default position for a property owned jointly by a married couple is 50:50. I know you disagree with me over this but I think the evidence is clear how this should be treated. I appreciate you know your tax but you can't just do things how you want and argue that 'manuals are just guidelines to help them and us, and not actually law, which is why they not be followed blindly' without coming a cropper at some point.

Meadowlands · Senior Member

Of course mortgage companies are interested in who owns a property, you have to declare if anyone has a charge over a property when you take out a mortgage, military can get a low interest loan to help with deposits for houses. So we have to put that the Secretary of State for Defence has a charge on our property even though it is a very small %of the mortgage. If you don't tell them then if you read the small print then you will be in breach of your mortgage agreement. If the mortgage is in only in 1 name and people have an agreement to split things then that may be allowed.

The initial question was not about whether Directors need to fill in a Self Assessment, the client in question is not in a Ltd company, in fact I think they are probably fairly typical of many military families in having to rent out a property as they are moved constantly. I am going to advise my client that they haven't been given the best advice and that going forward they need to split 50;50 unless they change to tenants in common.

Thanks for everyones help, its why I love this forum, working for yourself you need somewhere to go for advice and a sounding board. have a great weekend

Amanda · Expert

The mortgage company do have to be informed I know that for a fact. If someone has a residential mortgage and lives in the property and then say for instance moves in to a girlfriend's house and decides to rent his house out to cover the mortgage while he is co-habitating with the girlfriend then technically the person on the mortgage has to inform the mortgage company that they now don't live there and are renting it out and then it is up to the mortgage company if they will allow it to be a residential mortgage or if they want it to go to a 'buy to let' mortgage which normally has a higher rate of interest.

If you fail to inform the mortgage company of any chances you are in breech of their terms and conditions and if they find out you will be in trouble!

So just splitting it and filling out a form just to suit the tax liability isn't good enough, there are other things to consider as well.

YLB-HO · Guru

Amanda, I am going to play "Devils advocate", please explain to me what "trouble" a person will get into and what the lender will actually do?

1. You don't tell your lender you and they never find out.

or

2. You don't tell your lender and they do find out.

BTW - I have a client whose mortgage broker TOLD him to put the property & buy to let mortgage in his name only. The mortgage broker suggested (and they arranged) through their solicitor a trust on 50/50 basis, the ownership of the property, as they purchased it together. The lender was NOT informed as there was no reason to inform them. The solicitor actually confirmed this. The property rental income is declared as his and his girlfriends income as a 50/50 share.

YLB-HO · Guru

I also look after a few Resident management companies and deal with all the sales & purchase, so I know quite a lot about the legal side of property purchases.

No two solicitors ever ask the same questions, some ask for things that are so out of date, that it is obvious they don't have a clue. I even have one flat owner whose solicitor mucked up his purchase, that I had to refuse to provide the paperwork to allow the transfer on the sale. When the person sells they will discover this and have to sort it out, or they will not be able to sell. Their mortgage company does not know anything. How would they? I don't know who they are, and the person who pays the mortgage is not aware there is a problem. HMRC don't care because the stamp duty got paid. The mortgage companies should be all named on the insurance as having an interest, but only about 75% of the solicitors bother to provide the information for me to pass onto the insurers.

Some solicitors don't even put the purchase price on the paperwork that goes to Land Registry. There is no record of the price which the previous owner paid on the house I live in. You'd think it was a legal requirement, but it is not.

But then a company director helping themselves to the company money is technically Fraud. But the Fraud is committed against the shareholders, who are?? The company director who committed the fraud, so it is no longer fraud.... so we turn it into a directors loan and the company pays tax on it until the director repays it (or never repays it, and then its supposed to be a BIK). But HMRC don't care, because in the meantime they are keeping the tax they got when the money was first "borrowed". I think I may be getting a bit cynical about how things work....

RobH · Expert

YLB-HO wrote:
Amanda, I am going to play "Devils advocate", please explain to me what "trouble" a person will get into and what the lender will actually do?

1. You don't tell your lender you and they never find out.
or
2. You don't tell your lender and they do find out.

My take on this would be:

1. If they don't find out then they will do nothing obviously, however I think what has been pointed out is that it is a standard clause in the mortgage agreement that any changes be it of ownership or to let a previously non BTL then they need to be told. How likely they are to find out is kind of irrelevant since we are advising the correct procedure rather than how to buck the system.

2. If they find out then you would be in breach of the contract and they could in theory call in the mortgage. I'm not saying they will but they would technically be able to do so.

I think the important thing here is to let our clients know what their responsibilities are, if they decide to ignore the proper advice then so be it but as professionals surely we should give the correct advice?