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Replies to Queries - 4 - First among equals

22 August 2001
Issue: 3821 / Categories:

A client and his wife own residential property jointly, and this is rented out. The wife works full time and has agreed with her husband that he is responsible for collecting all the rents, dealing with the administration and accordingly can retain any profits.

Prior to becoming a client, the husband handled his own tax affairs and wrote on his tax return 'all lettings are handled by me and are therefore returned as my income notwithstanding the continued joint ownership of the property with my wife'.

A client and his wife own residential property jointly, and this is rented out. The wife works full time and has agreed with her husband that he is responsible for collecting all the rents, dealing with the administration and accordingly can retain any profits.

Prior to becoming a client, the husband handled his own tax affairs and wrote on his tax return 'all lettings are handled by me and are therefore returned as my income notwithstanding the continued joint ownership of the property with my wife'.

However, paragraph 24 of Revenue booklet IR150 appears to suggest that any income from property owned jointly by husband and wife has to be treated as arising to them in equal shares unless interest in the property itself is held in unequal shares.

What are readers' views on this situation? In particular, is it possible to argue that there is a partnership in existence between husband and wife and accordingly the net income can be divided between them in whatever shares they should agree, notwithstanding their different interests in the capital? This is possible with a normal partnership and there seems no reason why it should not be possible where the venture is not a trade or profession.

(Query T15,863) – Puzzled.

 

I take it that owning the property jointly means in equal shares. To explain the Revenue's booklet IR150, paragraph 24, in greater detail, sections 282A and B, Taxes Act 1988 give the general rule, where a husband and wife are living together, income from jointly held property is treated as being received equally. However, if the property is not owned in equal shares a joint declaration may be made to the Inland Revenue on form 17, with the income being divided in the same proportion as ownership of the property; this is effective only from the date of declaration, which has to be with the Inspector of Taxes within 60 days of that date to be effective. This rule does not apply to earned or partnership income, or to income to which a spouse is beneficially entitled. This basis is also mentioned in paragraph 143 of the Revenue's Independent Taxation Manual on jointly held property:

'Declaration must reflect reality – A married couple does not have a general option to split joint income in any way they like. They can only depart from the standard 50:50 split where:

* each spouse is in fact beneficially entitled to share other than 50:50 in the asset and the income, and

* the beneficial share that a spouse has in the income is the same.

Where both conditions are met, the couple can make a declaration to this effect. They are then taxed on their actual entitlements.'

Based on this, a telephone call to the client's tax office describing the current position might be a sensible method to correct the past years' errors. This will need to be followed up in writing. If retention of the current division of the letting income were wanted, then the necessary transfer of ownership would need to be carried out.

Regarding 'Puzzled's' query on possible treatment of the property income as partnership income, I would refer to Revenue Interpretation RI137, 'Assessment of Schedule A Income arising to a partnership', and quote '… joint ownership of a property does not, of itself, create a partnership. There will only be a partnership if, exceptionally, the exploitation of the property constitutes the carrying on of a business jointly with a view to profit. Where the letting income is not ancillary to a Case I or II partnership source, and the letting activity cannot be described as the carrying on of a business the income arising is not assessable as partnership income. Instead, each share will be assessable as the personal income of Mr and Mrs Jackson. In this context there is a distinction between the term 'business' as used in the Partnership Act 1890 and the new concept of a 'Schedule A business' introduced by Finance Act 1955.' It therefore appears there is nothing to argue about! – Goldstone.

 

'Puzzled' is right that income from property jointly owned by spouses is normally divided equally. This is because most such property is owned in the capacity of 'joint tenants', which means that each has an equal interest in the whole, so, when one dies, the property automatically passes to the other survivorship.

However, one can cease a joint tenancy in such circumstances, as the purist will doubtless be aware, and create a 'tenancy in common' whereby each share is separate and tangible, and is capable of being owned in unequal proportions i.e. 90 per cent – 10 per cent. The clients could then make the necessary declaration on Revenue form 17, but this is incapable of having retrospective effect. Bear in mind too, that tinkering about with the proportions in which spouses' assets are owned could have adverse inheritance tax consequences, and would incur the professional costs necessary for the suitable revision of both spouses' wills. If any potential beneficiaries were to lose out as a direct result of income tax advice on methods of property ownership, they might also sue the practitioner.

The following solution solves the problem of not being able to retract statements already made on the husband's submitted tax returns, and avoids alleged 'discovery' by the Revenue at some later date. The following phraseology should be inserted on the husband's tax returns each year: 'Mr X manages the property on a commercial basis, and it is, and always has been, agreed between the parties that he should receive all the profits, in lieu of commission charged for his services'. This effectively converts the profits from Schedule A to Schedule D, Case VI, and fulfils the essential disclosure and discovery requirements. – Holmewood.

Issue: 3821 / Categories:
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