In the case of Revenue and Customs Commissioners v Deepak Koshal and another) (TC/2012/06976 & 06977, published on 5 August 2013) the First-tier Tribunal (“FTT”) considered whether rental income from properties held jointly by spouses can be assessed solely on one spouse in the absence of a declaration of beneficial interests. The taxpayers’ grounds for an unequal split were that the relevant spouse carried out all duties with regard to managing the properties.
The key facts are:
- Mr & Mrs Koshal own a portfolio of investment properties;
- The rental income was returned by Mr Koshal up to 2003/04; and by Mrs Koshal from 2004/05 onwards;
- No declaration allocating income on the basis of beneficial interests had been made;
- HMRC raised assessments allocating income equally;
- Mr & Mrs Koshal appealed on the grounds that the properties were managed by Mrs Koshal and so the income was assessable on her;
- HMRC disagreed – stating income from properties held jointly by spouses is allocated equally between them unless a declaration of unequal split is made;
- Following an unsuccessful internal review, Mr & Mrs Koshal appealed to the FTT.
In their appeal the taxpayers contended that Mr Koshal had no involvement in the day to day management of the properties so was not assessable on a share of the income. They noted that the case Kings v. Barker (2004) established a principle that profits can be shared other than equally. They also contended that a declaration of an unequal split is not required.
HMRC contended that management of the properties is not a relevant factor. Section 836 ITA 2007 requires the income to be assessed equally between Mr & Mrs Koshal in the absence of evidence that the beneficial interest is held otherwise and election made under s837.
The FTT concluded in favour of HMRC that the rental income was assessable equally between Mr & Mrs Koshal, finding:
- actual management of the properties is not a relevant factor in rebutting the requirement for an equal split of income between spouses;
- the Kings v. Barker case was not relevant as it related to an unmarried couple for whom there is no statutory provision for equal shares;
- a declaration of beneficial interests is not obligatory but provides the necessary evidence for an assessment on an unequal basis.
In summing up, the FTT concluded:
‘The Tribunal was presented with no evidence to show that the parties intended there to be a split in both income and capital which was otherwise than 50:50 … It is not sufficient to say that Mrs Koshal ran the administration of the property rental business … It would have required an irrevocable declaration jointly made on Form 17’.
This case reinforces the need to make a declaration but that this can only be based on underlying beneficial interest in both income and capital and not on other factors such as management of the properties.
For further information and advice on issues arising from this case please contact the TaxDesk on 0845 4900 509 and ask for Lawrence Adair.