Jointly-owned property: get it right

The property and the problem

This was the story of an appeal by taxpayer, Mr Bevan, against penalties for not having notified HMRC of a tax liability in relation to property letting income: and in the event that the penalties were correctly issued, whether he had a reasonable excuse.

The property in question had been bought in 1999. It was owned jointly by Mr Bevan and his wife, and kept for personal use for seven years before being let out, at less than market rent. Rental income was paid into Mr Bevan’s bank account. In 2022, HMRC wrote to Mr Bevan asking for details of his property income.

Mr Bevan thought that he had no tax liability in respect of the property. He explained that his income was taxed under PAYE and that the couple considered that all rental monies belonged to Mrs Bevan. She had no other income, and it seemed a sensible way to make use of her Personal Allowance. Since net rental income was less than the Personal Allowance, they did not appreciate that they had to declare it to HMRC.

Unfortunately, no professional advice had been taken to check that these assumptions were right. This was particularly important because the Bevans did not realise that HMRC automatically treats income from jointly-let property as being split equally between spouses, unless an election is made to the contrary.

Muddles and mistakes

The Tribunal was sympathetic, finding Mr Bevan ‘a very honest and open witness who fully acknowledged that he did not appreciate all of the subtleties of the issues concerning property income... split between joint owners ’. But that was not enough.

‘What is clear is that there was a muddle and a bona fide mistake was made. We all make mistakes. This was not a blameworthy one. But the Act does not provide shelter for mistakes, only for reasonable excuses. We cannot say that this confusion was a reasonable excuse.’

Its verdict? ‘We have found that the Appellant failed to seek the appropriate advice and proceeded on the basis of a misguided assumption.’

Jointly-owned property: the rules

There are special rules for the letting out of property owned jointly by spouses or civil partners. These apply a default 50:50 split of rental income, whatever the actual beneficial ownership of the property. This won’t necessarily produce the best outcome for tax purposes, and if the actual beneficial interests in the property are different, an election can be made to change the split. It’s done using HMRC Form 17. Evidence of the actual division of the beneficial interests in the property, such as a declaration or deed, will be needed as part of the process.

Take-away message

The case can be summed up quite simply: if in doubt, ask. Should push come to shove, it will always put you in a better place with HMRC. Though as a First-tier Tribunal case, the verdict is not binding, it’s a stark reminder of the importance of being up to speed with the rules — and the need to take appropriate professional advice.