Readers' Forum
Replies to Queries — 2
Income sharing
We are acting for a number of married couples who let jointly owned furnished holiday letting accommodation. Typically, one spouse may be working full time and have significant earnings, whilst the other may have no earnings or other income at all. It is therefore useful from an income tax planning viewpoint to be able to allocate the net letting profits or losses on an unequal basis.
Readers' Forum
Replies to Queries — 2
Income sharing
We are acting for a number of married couples who let jointly owned furnished holiday letting accommodation. Typically, one spouse may be working full time and have significant earnings, whilst the other may have no earnings or other income at all. It is therefore useful from an income tax planning viewpoint to be able to allocate the net letting profits or losses on an unequal basis.
Mike Down and Stephen Berger (Taxation, 10 June 2004 at pages 277 to 279) remind us that the '50/50 rule' does not apply to furnished holiday lettings. We note that section 282A, Taxes Act 1988 stipulates that income arising from property owned jointly by husbands and wives is regarded as being received in equal shares, but subsection 4A specifies that this general provision will not apply to 'earned' income.
Section 503 Taxes Act 1988 specifies that furnished holiday lettings are treated as a trade and on this basis therefore, any income is deemed to be earnings.
We understand that the Revenue is now challenging the unequal sharing of furnished holiday letting profits or losses, on the basis that the 'deemed trade' provisions of section 503 are to be distinguished from actual Schedule D, Case I earned income and that section 282A(4A) is not applicable in such situations. Taxpayers would then have two alternatives — accept equal sharing for tax purposes or lodge an election with their tax office on form 17, with the legal, capital gains tax and inheritance tax ramifications of the property being beneficially owned un-equally between the two spouses.
We would be interested to hear readers' views of the Revenue's approach to the jointly owned property provisions, as they apply to furnished holiday letting activities.
(Query T16,445) — By the Bay.
When considering cases of joint ownership, it is imperative first to ascertain the respective shares in the property owned (beneficially) by each spouse. If this is done, the lodging of a Form 17 (where applicable) would have no legal or tax ramifications as the form would merely reflect the actual division of the beneficial ownership in the property.
Having identified the spouses' actual entitlement to the profits from the lettings, one can then follow through the tax consequences of the fact that the lettings qualify as furnished holiday lettings. Section 503(1) indeed provides that the income is treated as if it were the profits of a trade chargeable under Schedule D, Case I. But, and this is a big 'but', this deeming is only 'for the purposes specified in subsection (2)'. These purposes are stated to be the rules for loss relief and the definitions of relevant earnings (for pension purposes) and earned income (in section 833(4)(c)). In other words, the income is still Schedule A income; it simply has the advantage of qualifying for some of the reliefs generally restricted to trading income.
It is at this point one can then consider the effect of section 282A. (The amendments to that section proposed by this year's Finance Bill are of no consequence to this particular situation.) Section 282A(1) deems income from jointly owned property to be received in equal shares notwithstanding any difference in the actual beneficial entitlements. However, as 'By the Bay' points out, subsection (4)(a) provides that this deemed 50:50 split does not apply to earned income.
On the basis that the deeming in section 503 is for limited purposes only, it would initially appear that the exclusion in section 282A(4)(a) does not cover furnished holiday lettings as seems to be suggested by the Inland Revenue. However, it is necessary to examine closer the 'purposes specified in subsection (2) [of section 503]'. The last of these specified purposes is section 833(4)(c), Taxes Act 1988. Section 833(4) provides a definition of 'earned income' for all of the Income Tax Acts and, therefore, for the purposes of section 282A. In other words, the income from a furnished holiday letting is, for the purposes of section 282A, earned income. Consequently, the 50:50 rule does not apply and income is therefore assessable in accordance with the actual split of beneficial ownership. In other words, an unequal share of the income is only appropriate if the property is so owned.
If 'By the Bay' wishes to vary the proportions into which the income is split for any clients, it will be necessary to vary the shares in which the clients' properties are beneficially owned. But the clients will have to be warned of the legal and tax ramifications of this.
