Mark McLaughlin outlines two income tax anti-avoidance provisions aimed at discouraging the transfer of income such as rents.
A question often asked by investment property landlords is whether they can transfer the right to rental income to family members, whilst retaining ownership of the property (e.g., a parent wants their adult offspring to receive the rental income from their buy-to-let property, to help them save for their first home).
There are various potentially complex tax implications to address. This article highlights two of them, but in practice the question must be considered ‘in the round’, taking account of tax and non-tax law.
Is that ‘settled’?
In the above scenario of a parent and adult child, the ‘settlements’ anti-avoidance rules can apply to counter any income tax saving for the parent if they can benefit from the property interest gifted.
The settlements rules can apply if (say) income arises from property in which the parent retains an interest. A retained interest can arise if there are any circumstances where the property or any ‘related property’ (e.g., property income) will or may become payable or applicable to the parent (or their spouse or civil partner).
For example, if the rental income is paid into a joint bank account of the parent and child from which they can both withdraw, HM Revenue and Customs (HMRC) is likely to consider that this arrangement is a settlement, and tax the parent on the rental income deposited in the account (ITTOIA 2005, s 625(1)(c)).
Keeping the property
To the extent that it is not otherwise taxed as income, another possible line of attack by HMRC on the parent’s transfer of a right to rental income to their child is the income tax anti-avoidance legislation regarding ‘transfers of income streams’ (ITA 2007, Pt 13, Ch 5A).
Those provisions apply broadly where a right to ‘relevant receipts’ (e.g., rental income) is transferred to another person without a transfer of the asset (e.g., a property) from which the income arises.
If ‘caught’ by the rules, the person making the transfer is generally chargeable to income tax on a ‘relevant amount’ in the same way, and to the same extent, as the relevant receipts would have been chargeable but for the transfer of the rights to the income stream. The transferor is charged to income tax according to whether the transferred income stream represents income or profits. However, the measure of the income tax charge is not the income stream itself, but the sale proceeds for the right.
Alternatively, on a gift of the right to income (as in the above example) or sale at a substantial undervalue, the income tax charge would be based on the market value of the right.
The income is generally treated as arising when the transfer takes place. However, if (as in the example) the future receipts would have been trading income (or property income) for tax purposes, and part of the income would have been recognised under generally accepted accounting practice in another chargeable period, it is generally taxable accordingly.
Practical tip
An effective transfer of property income for tax purposes in the above example might involve the parent transferring an interest in the buy-to-let property interest to the adult child. This will have other tax implications (e.g., capital gains tax and inheritance tax), which would need careful consideration in advance.
