Tax implications on rent income

[anxious_ant]

Question regarding rental income for a relative, which I would appreciate some advice.

FiL bought a property and is planning to rent it out.
BiL has 10% ownership in the deed.
FiL currently overseas and plan to deposit rent income in BiL account.
Rent is about £800/month and I believe rental is managed via agent.

Does BiL have to declare this as rental income?
AFAIK rental income belongs to FiL, but using BiL bank account to hold the rent.

[Ham_and_Jam]

Is BiL going to recieve 1/10 of profits?

If so (without getting too complicated), at year end add up all income and expenditure. The apportion and declare 1/10 of net income to BiL and 9/10 to FiL.

[UpTheIron]

Why not just use his own (UK) account? It's an unnecessary complication.

Who will be named as landlord on the AST? How and when will the money get back to the FiL?

[deckster]

In principle, if it's his father's income then there will be no tax due on your brother. The fact that the money lands in his account doesn't per se make it taxable on him.

The difficulty will be in convincing HMRC that the money in his account isn't in fact his, and the longer it sits there the harder that will be. What happens to it after it lands there?

[anxious_ant]

Thanks for the replies all.
I believe FiL doesn’t have UK account, he is currently domicile in Spain.

I don’t think BiL will get any income from rent, he is just acting as someone holding the monies.

Will confirm if his name is on AST. Property is managed by agent and BiL is just acting as middleman. He does have power to authorise repairs on property though.

[anxious_ant]

deckster said:

In principle, if it's his father's income then there will be no tax due on your brother. The fact that the money lands in his account doesn't per se make it taxable on him.

The difficulty will be in convincing HMRC that the money in his account isn't in fact his, and the longer it sits there the harder that will be. What happens to it after it lands there?

He had 2 accounts with his bank. The other account is dormant and would be used to receive the rental income. The rental income will just sit there and will be transferred over to FiL’s Spanish account.

[anxious_ant]

Ok so I went on the HMRC website, and I believe there is a £1,000 tax free allowance on property income.

His share of the house as per deeds is 10%.
So this should mean he would be entitled to 10% share of rental income. (Correct me if I’m wrong here please)

Net rent income after charges from agent is about £750.
So for full tax year it’s £9,000.

His 10% would be £900 which is just below the threshold.

Am I missing anything here?

[superlightr]

anxious_ant said:

Ok so I went on the HMRC website, and I believe there is a £1,000 tax free allowance on property income.

His share of the house as per deeds is 10%.
So this should mean he would be entitled to 10% share of rental income. (Correct me if I’m wrong here please)

Net rent income after charges from agent is about £750.
So for full tax year it’s £9,000.

His 10% would be £900 which is just below the threshold.

Am I missing anything here?

20% NRL tax on overseas owner unless rated at 0% by HMRC.

Form NRL1 needs to be completed.

[Ham_and_Jam]

anxious_ant said:

Ok so I went on the HMRC website, and I believe there is a £1,000 tax free allowance on property income.

His share of the house as per deeds is 10%.
So this should mean he would be entitled to 10% share of rental income. (Correct me if I’m wrong here please)

Net rent income after charges from agent is about £750.
So for full tax year it’s £9,000.

His 10% would be £900 which is just below the threshold.

Am I missing anything here?

Yes, the £1000 tax allowance is only applicable if you don’t claim any other expenses. That includes letting agents fees etc.

[anxious_ant]

superlightr said:

20% NRL tax on overseas owner unless rated at 0% by HMRC.

Form NRL1 needs to be completed.

Excellent, many thanks for this

Is there anything that my BiL need to do on his end just to be in the safe side? Appreciate the arrangement is not ideal but I think this is short term and they plan to sell property in few years.

[anxious_ant]

Ham_and_Jam said:

Yes, the £1000 tax allowance is only applicable if you don’t claim any other expenses. That includes letting agents fees etc.

Don’t think BiL is claiming anything from rental income.
Rent from tenant goes straight to agent, who then will deposit the deducted amount (with VAT charged) to his account.

[Ham_and_Jam]

anxious_ant said:

Don’t think BiL is claiming anything from rental income.
Rent from tenant goes straight to agent, who then will deposit the deducted amount (with VAT charged) to his account.

You have deducted the agent fees, that means the property allowance cannot be used.

[anxious_ant]

Ham_and_Jam said:

You have deducted the agent fees, that means the property allowance cannot be used.

Ah I see. This is pretty complex stuff

Assuming nothing is deducted, it’s £850 per month.
10% of this over financial year means he exceeded allowance by £20. Does this mean he have to declare the £20 in self assessment? Or does this mean he have to declare £1,020?

I suppose there is also a question of how the rental income is divvy up. I am just basing this on the deed. Will HMRC accept this? Would the money being in BiL’s account be an issue?

Thank you for all the helpful answers, appreciated.
BiL contacting few local accountants but struggling to get any replies.

Edited by anxious_ant on Friday 17th September 17:43

[Eric Mc]

HMRC doesn't care where rental income is banked. What they want to know is who is legally entitled to the rental income. That will determine who pays the tax on that rental income.

[anxious_ant]

Eric Mc said:

HMRC doesn't care where rental income is banked. What they want to know is who is legally entitled to the rental income. That will determine who pays the tax on that rental income.

Thanks Eric.

Found something on HMRC website regarding Joint Ownership.

HMRC said:

Joint ownership
You can share ownership of rental property with other people and the amount of rental income on which you will pay tax will depend on your share of the property

So this would mean BiL ownership of the rent is 10%.

Also found this regarding allowable expenses

HMRC said:

Allowable expenses
You can deduct expenses from your rental income when you work out your taxable rental profit as long as they are wholly and exclusively for the purposes of renting out the property.

Find examples of expenses incurred wholly and exclusively for the property rental business.

You can also claim expenses for the interest on a mortgage to buy a non-residential let property.

Other types of expenses you can deduct if you pay for them yourself are:
<snip>
letting agent fees and management fees

So it looks like BiL should be exempted?
Rent = £850/month
Rental income after management fees = £748/month
12 month rental income after management fees = £8,976 per year
10% ownership (1 year) = £897.60 which is under £1,000 personal allowance ?

Edited by anxious_ant on Saturday 18th September 09:53

[Eric Mc]

Looks like that will be the case. But it's not too far under so any increase in the overall rental income could push him over the £1,000 threshold.

I am assuming that there is no mortgage interest being offset as part of the costs?

[Ham_and_Jam]

You haven’t allowed for any other expenses either.

Annual Gas certification.
General Maintenance & repairs
5 year Electric report (EICHR)
Vacant periods between tenants (all utility bills, Council Tax, and no income)

You’ll be lucky not to spend at least £500 per year per property.

Edited by Ham_and_Jam on Saturday 18th September 10:55

[Halitosis]

Even if your BIL's share falls within the £1,000 tax free allowance I expect he will still need to complete a tax return and declare it

[anxious_ant]

I've asked FiL and he will file his tax return in country of domicile.

Found this on HMRC property income manual.

HMRC said:

Jointly owned property: no partnership
Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.

So if they draw up a legal document (Declaration of Trust?) stating that my FiL will be in ownership of 100% of rental income, BiL would be exempt from tax. This is their intention afterall.

I do appreciate all the helpful replies here, many thanks again.
We've been trying to contact accountants but not really getting anywhere.

[Eric Mc]

Halitosis said:

Even if your BIL's share falls within the £1,000 tax free allowance I expect he will still need to complete a tax return and declare it

No - the rules say that you do not have to return anything to HMRC if you are availing of the £1,000 allowance.