Koshal case highlights joint tax liability on rental income

The recent First Tier Tribunal (FTT) decision in the case of Koshal & Anor in favour of HMRC raises issues about the taxable liability of rental income and the use of lower and higher rate tax allowances between married couples and civil partners, particularly for buy to let owners.

The FTT dismissed the taxpayer's appeal against HMRC's decision that the rental income from a property he held jointly with his wife was assessable on them in equal shares pursuant to the Income Tax Act 2007 (ITA 2007), s836.

In the case of Koshal & Anor [2013] TC 02806 [2013] UKFTT 410 (TC), Judge Dr Kameel Khan. said that there was no evidence to show that the taxpayer and his wife intended there to be a split in both income and capital which was otherwise than on a 50:50 basis. That would have required an irrevocable declaration jointly made on form 17, identifying the sources of income to which it applied and the split in the underlying capital interest, to have been filed with HMRC which was not done.

The appeal was dismissed.

This case concerns the common situation of investment property owned jointly between husband and wife where one of the spouses is a lower rate taxpayer and the couple wish to make optimum use of those lower rates in minimising their overall tax liabilities.

Although the rental income was received into a bank account in the wife's name and she undertook all administration of the property rental business, the FTT held that without a declaration under ITA 2007, s827 (unequal beneficial interests) the income was jointly assessed in accordance with s826.

This case also highlights that omissions from tax returns do not constitute positive 'disclosure' sufficient to protect against a discovery assessment. To satisfy the obligation of full disclosure facts must be laid out very clearly for HMRC.

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