Q. My clients are husband and wife and they jointly own a rental property that qualifies as a Furnished Holiday Let (FHL). I have always split the rental income 50/50 on their Self Assessment Tax Returns despite that fact that the husband is retired and actually spends a greater part of time managing the property. Someone has told me that I can split the profits and expenses on this basis, is that true?
A. Yes it is, the Property Income Manual on HMRC’s website at PIM4015 explains that where a husband and wife (or civil partners) carry on a business that meets the FHL criteria then the profits or losses may be split in a way that that parties agree.
The legislation in the Income Taxes Act 2007 S386 (1) and (2) states that income arising from property held in the names of individuals who are married to, or are civil partners of, each other, and who live together will for income tax purposes be treated as it they are beneficially entitled to the income in equal shares and this is the case for ordinary rental property businesses.
However, as your client meets the FHL criteria they will be able to split the profits and losses on a different basis in line with the legislation at Income Taxes Act 2007 S836 (3) where it states the treatment under S386 (1) and (2) does not apply in relation to any income within certain exceptions and exception D states:
Income arising from a UK property business which consists of, or so far as it includes, the commercial letting of furnished holiday accommodation (within the meaning of Chapter 6 of Part 3 of ITTOIA 2005).
This guidance goes with the warning that the profits are being split on a commercial basis and not just as a means to avoid paying tax (for example if the husband is a basic rate taxpayer and the wife pays higher rate). In your clients case the husband factually spends more time managing the property so would be able to demonstrate the basis on which it has been split e.g. 75/25 should HMRC make a challenge.