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Replies to Queries - Mother and son

12 May 2005
Issue: 4007 / Categories:

We act for a family business where a mother and her son own the business property, which has a flat above. The original property purchase was made in equal shares.
Mother has approached us for advice as she wishes the income to be received mainly by her son. She has suggested that proportions of, say, 90% to son, with the remaining 10% going to her, would be acceptable.
However, she would wish to retain a beneficial share in the property of 50%.
Our queries are as follows.

We act for a family business where a mother and her son own the business property, which has a flat above. The original property purchase was made in equal shares.
Mother has approached us for advice as she wishes the income to be received mainly by her son. She has suggested that proportions of, say, 90% to son, with the remaining 10% going to her, would be acceptable.
However, she would wish to retain a beneficial share in the property of 50%.
Our queries are as follows.

  1. Does the beneficial ownership have to change as well (e.g. a transfer of 40% by the mother to the son)?
  2. If not, is a simple form 17 all that is required?
  3. Presumably the ownership must be as tenants in common for this arrangement to work?
  4. Are there stamp duty implications if the property is mortgaged?

If the answer to the first question above is in the affirmative, could the property effectively be transferred over several years to avoid capital gains and would this involve additional stamp duty land tax liabilities.
Readers' comments are welcomed.
Query T16,606 — Beneficial Owner.

 

Reply by 'Southern Man'

This subject always seems problematic. I have dealt with several cases where clients, commonly siblings, own property jointly (50% each) and for various reasons — perhaps one does more work or the other has less other income — they divide the rent in proportions other than the beneficial ownership. Trying to persuade these clients that they are assessable to tax on income that they might not have physically received can be difficult.
The rules for married couples offer a little more scope for planning in that the income from jointly-owned property (with the exception of shares in a close company) is treated as being owned equally for income tax purposes, regardless of the ownership proportions. However, if owned other than equally, the spouses may complete a form 17 and elect that the income should be assessed to tax in the proportions of actual ownership.
Unfortunately, what we have here does not fit with these scenarios. First, we are dealing with a mother and son and secondly she wishes to retain her 50% share. The answers to the questions put by Beneficial Owner are as follows.

  • Yes, in non-married couple cases, the beneficial ownership would have to change to correlate to the desired income split.
  • Form 17 is only applicable to married couples.
  • Yes, because joint tenants have equal rights in one asset.
  • Stamp duty land tax will not be payable unless there is consideration, which could include a mortgage.

With regards to the final question, the interest in the property could be transferred in tranches, but this may be ineffective for capital gains tax purposes. This would seem to be a 'series of transactions' with TCGA 1992, s 19 and, if carried out within a six-year period, the values may be adjusted to reflect an 'appropriate portion of the aggregate market value'. However, this would mean that the annual exemptions would still be obtained. If this was between unconnected persons, the Revenue might argue that there was a contract for the transfer of the whole property at the outset as it might be unlikely that one would pay for relatively minor shares of a property. Here, it might be that the reason for the periodic transfers was to reflect the mother's decreasing need for the income associated with them.
In this case, it would seem that the property is, to some extent a business asset, so that business asset taper relief would apply on the disposals. It may also be worth mentioning the Revenue's views as set out in Revenue Interpretation, RI 137, 'Schedule A: partnerships — self assessment'. This states that if business partners own a property jointly, then if 'that business comprises both a Schedule D, Case I source and a Schedule A source, then TA 1988 s 111(7), (8) would apply. The income from the Schedule A source will be assessable using the basis periods that apply for the Schedule D, Case I source'. However, the Revenue notes that 'joint ownership of 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 [the owners]. 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 FA 1995'. This would seem to rebut the idea that one could argue that the Schedule A income could be split in accordance with a 'partnership' agreement, separate from the actual capital ownership. 

Issue: 4007 / Categories:
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