PIM1030 - Introduction: Who receives property income?

S271 Income Tax (Trading and Other Income) Act 2005 (ITTOIA05)

Introduction

For income tax purposes, under S271 ITTOIA05 the person liable to income tax on the profits of a property business is “the person receiving or entitled to the profits”. Where property is owned jointly by more than one person it is important to establish the proportion of the profits on which each person is liable to income tax.

The test “receiving or entitled to the profits” does not rely on land law concepts. Notably the share of beneficial ownership (often defined as the right to receive income from property) does not automatically determine the share of property income for income tax purposes, although in many cases individuals receive income in the share to which they are entitled so the two parts of the test work together.

Case law

In the cases of Khan v HMRC [2021] EWCA Civ 624 and Good v HMRC [2023] EWCA Civ 114 the Court of Appeal examined the meaning of “receiving or entitled to” for the purpose of ITTOIA05/S385(1)(b) and ITTOIA05/S611 respectively. In both cases the Court of Appeal said the phrase “the person receiving or entitled to” is used in many other provisions of ITTOIA05 and it must be given a consistent meaning when denoting the persons chargeable to Income Tax. In both cases, the Court held that:

  • the focus of the respective statutory provisions must be on the transaction giving rise to the income in question,
  • either receipt or entitlement will be sufficient to come within the scope of those provisions, and
  • to satisfy the “entitled to” leg it is not a requirement for a person to be “beneficially entitled” to the income in the sense used in other statutory provisions.

In Good, the CoA confirmed that “entitled to” should be given its ordinary meaning. In Khan, Andrews LJ considered it appropriate to use the term “belong(s) to” and in the earlier case of Bobat [2017] UKFTT 227 (TC) the First-tier Tribunal found that the person “receiving or entitled to the profits” of a property business is the person who “receives and controls” it. In Bobat the beneficial owner of property was liable to income tax on property income arising from property legally owned by his children. However, Whipple LJ considered (in Good) that it was better to stick to the words of the statute in determining the issue in that case.

Key points

The test “receiving or entitled to the profits” also operates regardless of the form of ownership for land law purposes - for example, joint tenancy or tenancy in common in England and Wales. For an approach to joint tenancy cases see the Trusts and Estates Manual at page TSEM9330.

In cases where the person receiving the income seems to differ from the person entitled to it, or the share of income received differs from formal joint ownership shares, it is important to establish the reality of the situation. For example, if A and B jointly own a property (both legally and beneficially) but the evidence shows that A controls the letting activity and receives all of the income, whereas B is not involved other than being a name on legal documents, then A would be the person receiving the income for income tax purposes regardless of the legal form of the arrangements.

Finally, it is common in property letting for a person to receive rental payments on behalf of one or more people (including themselves). Receiving rent as agent of another person does not mean the agent receives the income for tax purposes.