Neutral Citation: [2025] UKFTT 595 (TC)
Case Number: TC09535
FIRST-TIER TRIBUNAL
TAX CHAMBER
In public by remote video hearing
Appeal reference: TC/2024/03152
INCOME TAX - income from letting real property - whether taxable on the appellant alone or was her former husband liable to tax on half - held taxable on appellant alone - appeal dismissed
Heard on: 29 April 2025
Judgment date: 29 May 2025
Before
TRIBUNAL JUDGE NIGEL POPPLEWELL
MR SIMON BIRD
Between
ALISON MOSS
Appellant
and
THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS
Respondents
Representation:
For the Appellant: In person
For the Respondents: Mr Kieran Gargan litigator of HM Revenue and Customs' Solicitor's Office
DECISION
INTRODUCTION
1. This appeal concerns income tax arising from the letting of the property in Dunblane ("the property") between (roughly) February 2017 and March 2020. During that period it was let out on Airbnb. It is HMRC's view that the appellant is solely liable to income tax on the income derived from the property during this period and have issued discovery assessments ("the discovery assessments") for the 2017/2018, 2018/2019, and 2019/2020 tax years ("the relevant tax years") to the appellant assessing a total amount of tax of £10,748.58.
2. The appellant does not challenge the validity of the discovery assessments. It is her view, however, that the rental income derived from the property during that period benefited both herself and her former husband, and thus he should be liable for tax on one half of that income.
3. It is her view, too, that loan repayments relating to solar panels which had been installed at the property should be deductible from the income which has been assessed.
4. The rental income had not been reported to HMRC on the appellant's tax returns. HMRC have not issued any penalties for this failure. They appreciate that the appellant was in an extremely difficult personal position and have, effectively, recognised that she simply made a mistake in failing to report the income. This is a humane and sensible decision. We too have considerable sympathy for the appellant's personal circumstances during the relevant tax years. But, as Mr Gargan correctly points out, our role, as is HMRC's, is to apply the relevant law to the facts.
5. For the reasons given later in this decision, it is our view that the appellant is solely liable to income tax on the rental income, and no deductions can be made for the costs associated with the solar panels. We have therefore dismissed her appeal.
THE LAW
6. There was no dispute about the relevant law, which is set out, albeit briefly, below.
7. A taxpayer has a statutory obligation to notify HMRC if they are liable to income tax for any year of assessment (section 7 Taxes Management Act 1970 ("TMA")).
8. If HMRC discover that an amount of income tax which ought to have been assessed, has not been so assessed, they can make an assessment to make good that loss of tax (section 29 TMA).
9. Where the assessment relates to failure to notify under section 7 TMA, the assessment can be made at any time within 20 years after the end of the year of assessment to which the discovery assessment relates (section 36 TMA).
10. Income Tax is charged on the profits of a property business under section 268 Income Tax (Trading and Other Income) Act 2005 (("ITTOIA").
11. The person who is liable to tax on the profits of a property rental business is the person receiving or entitled to those profits (section 271 ITTOIA).
12. In calculating those profits, no deductions can be allowed for capital expenditure, nor for income expenditure which is not incurred wholly and exclusively for the purpose of the business (sections 33 and 34 ITTOIA).
13. Revenue expenses incurred for the purposes of the business within seven years before the date on which a property rental business starts may be eligible for a deduction against the rental income (section 57 ITTOIA).
14. The general rule of apportionment of income tax for liability arising from rental income, is that where the property is held in the names of individuals who are married and who live together, they are treated for income tax purposes as beneficially entitled to the income in equal shares (section 836 Income Tax Act 2007 ("ITA")).
15. Under section 1011 ITA, married individuals are treated as living together unless, (inter alia) they are in fact separated in circumstances in which the separation is likely to be permanent.
16. The general rule of apportionment does not apply to income arising from a UK property business which consists of (or includes) the commercial letting of furnished holiday accommodation ("the FHL exclusion").
17. Under section 323 ITTOIA, letting is commercial if the accommodation is let on a commercial basis with a view to the realisation of profits. It is furnished holiday accommodation if the tenant is entitled to use furniture in connection with the use of the accommodation, and during the relevant period the accommodation is available for commercial letting as holiday accommodation for at least 210 days and is actually let out during that period for at least 105 days (section 325 ITTOIA).
THE EVIDENCE AND THE FACTS
18. We were provided with a bundle of documents. HMRC Officer Arlene Kane ("Officer Kane"), the assessing officer, provided a witness statement on which she was briefly cross-examined by the appellant. The appellant gave oral evidence on her own behalf. From the foregoing evidence we find as follows:
(1) The property was purchased in October 2013 by the appellant and her former husband with the benefit of a mortgage from Handelsbanken.
(2) Throughout the relevant tax years, it was jointly owned by the appellant and her former husband.
(3) The appellant's evidence was that the property was sold during the first Covid lockdown in, she thought, July 2020.
(4) In February 2015 the appellant's former husband went abroad to Bangkok on business. Before he left, he executed a power of attorney in her favour ("the power of attorney").
(5) The power of attorney is dated 2 February 2015. By it, her former husband appoints the appellant as his attorney and grants her certain powers including the powers: to execute and deliver deeds and documents including those required to sell the property; to maintain and pay any expenses in connection with the property; to buy lease sell and otherwise deal with any interest in the property; and to sign seal and execute any documents in connection with the property.
(6) The immediate purpose of the power of attorney was to enable the appellant to sell the property whilst her former husband was away, given that he was not sure how long he would be away for.
(7) In October 2015 the appellant and her eight-year-old son visited her former husband in Bangkok for about a fortnight. Following that visit, during 2016, communications between the appellant and her former husband became erratic and in November 2016 communications ceased completely following a telephone call made by the appellant in which her former husband swore at her and then hung up. The appellant's evidence was that it seemed evident to her at that time that their marriage was clearly over.
(8) Her former husband was not making any financial provision for either the appellant or their son and was not paying the mortgage payments. A loan had also been taken out to purchase solar panels. 60 solar panels were installed on the ground and 30 on the roof of the property. Before her former husband left, he sold the 60 ground panels. The money for that sale was not used to discharge the outstanding loan for the solar panels. Repayments of this loan also ceased following his departure. However, the appellant was notified by Handelsbanken that her former husband had a card which enabled him to access the Handelsbanken current account, and he was taking money out of it whilst abroad. The bank, at her request, then withdrew this facility.
(9) In order to make ends meet, the appellant took some part-time jobs and considered selling the property. But following discussions with Handelsbanken, in February 2017, the appellant received permission to let the property out, which he then did until shortly before its sale in July 2020.
(10) She paid the rental income into a separate bank account (with the TSB). The reason for this was to ensure that her former husband had no access to that income. She used the income to bring up their child, and to pay day-to-day expenses. The property was essential to generate income to keep the family's head above water.
(11) The appellant borrowed money from her mother and stepfather in order to maintain repayments to Handelsbanken.
(12) During the period when the property was let out, the last thing on the appellant's mind was to complete a tax return. She was simply trying to make ends meet and bring up a child and to pay day-to-day living expenses. It never occurred to her to complete and submit a tax return. Furthermore, she had no idea whether her former husband was still alive, let alone where he was or what he was doing. It was not until, she thought, 2018, when, through solicitors, there was confirmation that he was still alive.
(13) In a letter to the appellant dated 18 February 2019, BTO solicitors informed her that they had been instructed by her former husband in connection with their matrimonial separation. They went on to say that they had been instructed that they had separated in or around November 2016 and he was keen to make progress in resolving financial issues. The solicitor's understanding was that the property was being marketed for sale and went on to say that "Notwithstanding the fact that you are separated our client was surprised that he was not consulted about this. Our client would like to consider other alternatives available to selling the propert[ies]y such as the possibility of retaining it and continuing to rent it on Airbnb as you do presently thus retaining a regular income...".
(14) Following receipt of this letter, the appellant instructed solicitors, and following the sale of the property and discharge of the secured loans, the equity of approximately £70,000 was used to pay off a variety of financial debts which the appellant had incurred, including those to her mother and stepfather, cash loans to her husband, discharge of the solar panel loans, conveyancing and estate agent costs and shortfall in the sale of a second property and discharge of a bridging loan.
(15) The appellant and her son then moved into the house owned by her mother and stepfather where the four of them currently reside.
(16) In December 2022, Officer Kane started to check the appellant's sources of income for the relevant tax years. In January 2023, the appellant provided information to HMRC regarding the lettings of the property and explained the position with Handelsbanken.
(17) The appellant provided relevant documents to Officer Kane, together with details of the rental income, during the spring and summer of 2023. On 14 August 2023, HMRC issued their pre-decision letter which summarised their view of the matter and provided calculations for the appellant's tax liability for the relevant tax years.
(18) In an email dated 3 September 2023, the appellant agreed the figures but explained that throughout the period in which the property was let out, she was acting under a power of attorney, jointly with her former husband, and asked that half of the tax assessment should be directed to him.
(19) In response, Officer Kane explained that in order for her to consider apportioning half of the tax to her former husband, the appellant needed to provide proof that he had benefited from half of the rent during the relevant period.
(20) In an email dated 17 September 2023, the appellant explained to Officer Kane that during this period, and with the knowledge of her former husband and with the benefit of the power of attorney, various joint liabilities were paid. These included the mortgage and the solar panel loan together with hire purchase liabilities taken out in her former husband's sole name, and settling financial support loans from her mother totalling over £70,000. These were liabilities of her former husband, and also included money that it was his responsibility to pay towards their son's upkeep.
(21) Officer Kane was not persuaded that the appellant's former husband was liable to pay half of the tax on the basis that she did not feel that the appellant's former husband had benefited from the rental income and accordingly issued the discovery assessments on 2 October 2023. The discovery assessment for the tax year 2017/2018 was for £1,820.20. The assessment for 2018/2019 was for £4,510.82, and that for the tax year 2019/2020 was for £4,417.56.
(22) On 2 November 2023, the appellant appealed to HMRC against the assessments on the basis that her liability should be reduced by 50% and that her former husband is liable for the balance. Furthermore, the solar panel loan repayments should be included as a revenue expense as these were a liability against the income. She was offered, and accepted, a statutory review. On 26 April 2024, HMRC issued their review conclusion letter which upheld the discovery assessments, following which on 26 May 2024, the appellant lodged her appeal with the tribunal.
(23) Officer Kane's evidence was that she had made a discovery of the loss of tax when the tax calculations were sent initially to the appellant on 3 September 2023. She also explained that in light of the fact that she had been told by the appellant that the solar panels had been removed before the beginning of the letting of the property, repayment of any loans could not be classed as a revenue expense of the property letting.
DISCUSSION
Submissions
19. In summary Mr Gargan submitted as follows:
(1) HMRC bear the burden of establishing that Officer Kane made a valid discovery and in time assessment which was properly served on the appellant.
(2) The evidence shows that this was the case.
(3) The burden then shifts to the appellant to show that she has been overcharged.
(4) It is clear from the evidence that the property rental business carried on from the property was carried on exclusively by the appellant. Her former husband, whilst he might have benefited from mortgage and other debt repayments for which he was jointly liable, was not carrying on the business with the appellant. The appellant has provided no evidence that her former husband was involved in, or even aware of, the carrying on of the property rental business.
(5) The presumption that income is shared jointly between husband and wife only applies where they are living together, and clearly this was not the case during the period when the property was let out.
(6) Furthermore, the FHL exclusion applies in this case. The property was clearly let out on a commercial basis. It was furnished, and a calculation of the availability of the property and the dates on which it was actually let, for the relevant periods, shows that the property was qualifying holiday accommodation.
(7) The appellant received the income from the lettings and was therefore the person who is liable to tax on that income.
(8) As regards the solar panels, these were installed prior to the property being let, and thus the loan repayments were not incurred wholly and exclusively for the purposes of the property rental business. Furthermore, the appellant has provided no evidence that the installation of the solar panels was for the purpose of letting the property and thus any revenue expense cannot qualify for deduction under the pre-trading expenditure rules.
20. In summary the appellant submitted as follows:
(1) When letting the property she was acting, jointly with her former husband, under the power of attorney.
(2) It is clear from the solicitor's letter dated 18 February 2019 that her former husband knew that the property was being let out.
(3) He clearly benefited from the income received from the property as it was used to discharge debts for which he was jointly liable, for example mortgage repayments to Handelsbanken, repayments of the solar panel loan, debts to other creditors, and payments for the benefit of their son for whom he clearly had both a financial and emotional responsibility.
(4) As a result, she should be liable to tax on only one half of the income received from the property.
Our view
21. We agree with Mr Gargan that it is for HMRC to establish, on the balance of probabilities, that Officer Kane made valid discovery assessments within 20 years after the end of the year of assessment to which it relates. We find that she did. Indeed, the validity of the discovery assessments was not challenged by the appellant.
22. So, the burden now shifts to the appellant to show that those assessments overcharged her. It is her view that they do so overcharge her. This is because her former husband benefited from the income derived from the property and thus should be jointly responsible for the tax on that income. And that repayments of the loan taken out to purchase the solar panels should be deducted from her income.
23. Unfortunately for the appellant, we do not agree with this view. We say this for the following reasons:
(1) The property was jointly owned by the appellant and a former husband. However, the general rule of apportionment that any income derived from the property is deemed to be owned equally does not apply to spouses who are not treated as living together. In this case it is clear from the evidence that they were physically separated in circumstances in which the separation was likely to be permanent with effect from November 2016.
(2) Furthermore, we agree with Mr Gargan that, on the facts, the FHL exclusion also applies.
(3) The property was being exploited in a property rental business as it was being let out on a commercial basis with a view to profit.
(4) So, we need to look at who was actually carrying on that business as the person who is liable to tax on the profits of such a business is the person who receives or who is entitled to those profits.
(5) There is no evidence whatsoever that the letting business was carried on by anyone other than the appellant. There is no evidence of a partnership between herself and her former husband. The fact that her former husband appears to have known that she was letting out the property does not mean that he was carrying on that business with her.
(6) Nor does the fact that she was carrying it out with the benefit of the power of attorney. This simply allowed her to exploit the property in a number of ways, which she did by letting it out. It did not reflect the involvement of her former husband in that business.
(7) Finally, simply because her former husband benefited from the use to which the income was put (it paid off debts for which he was jointly liable) does not mean that he was beneficially entitled to a half share of that income. It was simply that the income was applied by the appellant to pay debts for which he was jointly responsible. In order to be taxable, her former husband would have had to have been in receipt of, or entitled to, the income which he was not. It was the appellant alone who was carrying on the business and she who was therefore taxable on its income. We have no doubt that if someone had suggested to the appellant during the relevant tax years that she should pay away one half of the income to her former husband because he was entitled to it, that person would have got a very short shrift.
(8) We can understand why the appellant submitted that her former husband had benefited, as this was the information sought from her by Officer Kane during her enquiries. And in Officer Kane's view, he had not so benefited. But we are afraid for the appellant that benefitting from income derived from a business is not the correct test to determine whether a person should be taxable, to the extent of that benefit, on that income.
(9) Finally, as regards the deductibility of loan repayments taken out for the purposes of acquiring the solar panels, we agree with Officer Gargan that we have insufficient information to enable us to allow any such expenditure as a pre-trading expense. We do not know whether the repayments were capital or income, nor indeed were we taken to any evidence of what the amounts of the repayments in fact were. We are afraid, therefore, that we cannot allow any of the repayments of the loans taken out to acquire the solar panels as a deduction against the appellant's income for the relevant tax years.
DECISION
24. For the foregoing reasons, we dismiss this appeal.
RIGHT TO APPLY FOR PERMISSION TO APPEAL
25. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.
Release date: 29th MAY 2025