Koshal & Anor v Revenue & Customs

Factual and Procedural Background

This appeal concerns the tax treatment of rental income from properties jointly owned by a married couple, the Appellants. The dispute arises from Discovery Assessments issued by the Respondents for tax years 2000/01 to 2004/05 and 2006/07, Closure Notices for 2007/08, and a penalty determination under section 95 of the Taxes Management Act 1970 for the period 2000/01 to 2007/08.

The Appellants owned a portfolio of properties jointly and initially declared rental income on the husband's tax returns until 2004, after which the income was declared solely on the wife's returns. The Respondents challenged this, asserting that the rental income should be split equally between the spouses unless a declaration of beneficial interest (Form 17) indicated otherwise. The Appellants disputed the assessments, arguing the wife was entitled to all rental income due to her management of the properties. The dispute progressed through correspondence, assessments, appeals, and a review under section 49 TMA 1970, culminating in this Tribunal decision.

Legal Issues Presented

1. Whether rental income from properties jointly owned by a husband and wife should be assessed equally between them or wholly on one spouse.
2. Whether an absence of a declaration of beneficial interest (Form 17) affects the assessment of rental income.
3. Whether the penalty under section 95 TMA 1970 for failure to notify income is justified.
4. The evidential burden on the Appellants to prove beneficial ownership differing from equal shares.

Arguments of the Parties

Appellant's Arguments

• The wife undertook all management and administrative work related to the properties and was therefore entitled to all rental income.
• Under section 836 ITA 2007, a declaration of unequal beneficial interest is not necessarily required to allocate income other than on a 50:50 basis.
• No declaration is required under HMRC manuals (PIM 1030 and CG 22020) to reflect unequal income allocation.
• The split of potential profit on disposal is irrelevant to the allocation of rental income.
• The case of Kings v. Barker supports the principle that profits can be shared other than equally between cohabiting couples.
• The husband was not involved in property management and thus should not be accountable for rental income on his tax returns.
• The husband’s omission of rental income on his returns effectively notified HMRC that his rental income had ceased, and HMRC should have been aware of this, referencing HMRC v. Charlton Corfield & Another.
• No additional tax or penalties should be payable by the husband.
• The Appellant requested confirmation that no disclosures were required on the husband's returns and that the appeal be allowed.

Respondent's Arguments

• The rental income from jointly owned properties is to be assessed equally (50:50) between the spouses under section 836 ITA 2007, absent evidence to the contrary.
• The wife’s management of the properties does not affect the equal assessment of rental income.
• The case of Kings v. Barker is not applicable as it concerns cohabiting couples, whereas the current parties are married and governed by statutory provisions.
• A penalty is justified due to failure to notify income, reduced to 20% of the tax due.
• The Appellants have provided no evidence showing beneficial interest in the properties is held other than equally.
• The Appellants have failed to discharge the burden of proof on a balance of probabilities.
• The Respondents requested dismissal of the appeal and confirmation of the assessed figures.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal examined the statutory framework governing jointly held property income, primarily section 836 ITA 2007 (and its predecessor, section 282A ICTA 1988), which establishes a presumption that income from property held jointly by a married couple is to be treated as arising equally to both parties unless a declaration (Form 17) evidences a different beneficial interest.

The Tribunal found no evidence of such a declaration. The fact that the wife managed the properties and received rental income into her bank account was insufficient to rebut the statutory presumption of equal ownership and income entitlement. The Tribunal emphasized that administrative management does not equate to beneficial ownership for tax purposes.

Regarding the cited case law, the Tribunal distinguished Kings v. King on the basis that it concerned unmarried cohabitants, not married couples governed by the statutory provisions at issue. The Tribunal also considered HMRC v. Charlton Corfield & Another, concluding that the Appellants failed to make adequate disclosure to prevent discovery assessments.

The Tribunal reiterated that the burden of proof rested on the Appellants to demonstrate beneficial ownership other than equal shares and that this burden was not discharged.

Consequently, the Tribunal upheld the assessments made on a 50:50 basis and found the penalty imposed for failure to notify justified and reasonably reduced.

Holding and Implications

The Tribunal DISMISSED THE APPEAL.

The rental income from the jointly owned properties is to be assessed equally between the husband and wife in the absence of a valid declaration of beneficial interest to the contrary. The Appellant failed to discharge the burden of proof to establish a different beneficial ownership arrangement. The penalty for failure to notify income was appropriately imposed and reduced.

The decision directly affects the parties by confirming their joint tax liability on the rental income and the imposition of a penalty but does not establish new legal precedent beyond the application of existing statutory provisions and case law.