Tax and Property Owned Jointly

3 minutes to read

Spouses or civil partners who own joint rental properties must ensure they are aware of the rules regarding the reporting of income to HMRC.

This need-to-read case for married couples with jointly-owned property recently came before the Tax Tribunal.

In the case a taxpayer, Mr Bevan, appealed against penalties for a failure to notify HMRC of property letting income: and if the penalties were correctly issued, whether he had a reasonable excuse.

The highlights

Property owned jointly is automatically deemed to be split 50:50 between the couple and must be reported as such to HMRC unless an appropriate election is made.

Failure to disclose rental income, or incorrectly reporting the income to HMRC can result in significant penalties and interest being charged by HMRC and this case confirms that a genuine misunderstanding of the rules is not reason enough to appeal such charges.

The case

Mr and Mrs Bevan, a married couple, jointly owned a property. They purchased the property in 1999 for personal use and then began letting it out seven years later for below market rent. The income was paid directly to Mr Bevan’s bank account and in 2022, HMRC wrote to Mr Bevan asking him to disclose details of his property income.

The couple considered that the income from the property belonged to Mrs Bevan exclusively and, as she did not have any other income, the rental profits would fall within her personal allowance and there would be no tax liability on this income. They were not aware that the income would still need to be disclosed to HMRC.

They did not take any professional advice to confirm their assumptions. Crucially, they did not realise that income from jointly-let property was automatically split equally between spouses regardless of which spouse actually receives the income. In order to remove this automatic split, an election must be made to HMRC.

The judgement

Mr Bevan argued that he had a reasonable excuse and the penalties should not be charged by HMRC. Although the Tribunal was sympathetic, this case reiterated that the onus is on the taxpayer to ensure that they correctly disclose their income to HMRC.

The Tribunal summarised; ‘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.’ And the Tribunal agreed that the penalties charged by HMRC were correctly issued.

What are the rules?

Rental profits from property owned jointly by spouses or civil partners is, by default, split 50:50, whatever the actual beneficial ownership of the property. This won’t necessarily produce the best outcome for tax purposes.

If the actual beneficial interests in the property are different, an election can be made to change the split of rental profits. 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 and it will always be recommended to seek appropriate advice if you are considering making this election.

Take-away message

This case, and the penalties, could have been easily avoided if Mr and Mrs Bevan took early professional advice.

Though, as a First-tier Tribunal case, the verdict is not binding, it is a stark reminder of the importance of being up to speed with the rules.

Get in touch
Our experts are available to help if you would like to discuss this or any other tax, audit or accountancy queries.

Please call our Leicester office on 0116 254 9262, or Loughborough office on 01509 263 500. Alternatively, our contact form is here.

See also AUTUMN BUDGET 2024