The First-tier Tribunal (FTT) has rejected a woman’s argument that her former husband was liable to tax on half of the income from a rental property they jointly owned.
She and her husband had bought the property in 2013. In 2015 her husband went on business to Bangkok. As he was unsure how long he would be away, he executed a power of attorney giving her a number of powers in respect of the property. Communications between them ceased in November 2016, and it seemed to the woman that their marriage was clearly over. Her husband was not making any financial provision for her or their son and was not paying the mortgage, and in 2017 she began renting out the property on Airbnb. She eventually sold it in 2020.
She omitted to report the rental income on her tax returns, and HM Revenue and Customs (HMRC) contacted her to check her sources of income for the 2017/18 to 2019/20 tax years. HMRC was not persuaded that her husband was liable for half of the tax and issued discovery assessments totalling £10,749. After a statutory review by HMRC upheld the discovery assessments, she appealed to the FTT.
Under Section 271 of the Income Tax (Trading and Other Income) Act 2005, the person who is liable to tax on the profits of a property rental business is the person receiving or entitled to those profits. The general rule of apportionment of Income Tax on rental income is that where the property is held in the names of individuals who are married and who live together, they are treated as beneficially entitled to the income in equal shares. However, this rule does not apply to a UK property business that includes a commercial furnished holiday letting (FHL).
HMRC argued that it was clear from the evidence that the rental business was carried on exclusively by the woman. While her former husband might have benefited from mortgage and other debt repayments for which he was jointly liable, he was not carrying on the business with her. The presumption that the income was shared jointly did not apply because they were not living together when the property was let out. HMRC also argued that the FHL exemption applied.
Concluding that the woman was solely liable to tax on the rental income, the FTT agreed that she and her husband had been separated when the property was let out, and that the FHL exemption applied. The power of attorney simply allowed her to exploit the property in various ways, and did not mean that her former husband was involved in the business. The fact that he had benefited from the use to which the income was put did not mean that he was entitled to a half share in it.