Property income - married couple

[Edinburgh101]

Hi all. I am a higher rate taxpayer resident in England. My husband is a basic rate taxpayer. I own a residential property in Edinburgh, Scotland, solely in my name with no mortgage, which we are planning to rent out now that we have moved to England for the time being.
I am proposing to transfer 1% ownership to my husband, retaining 99% myself, without filing a Form 17. My understanding based on TSEM9814 and TSEM9846 is that as a married couple, HMRC would apply the 50/50 default rule under ITA/S836, taxing rental income equally between us regardless of the actual ownership split.
My specific question is: does the HMRC 50/50 spousal default rule apply given the property is located in Scotland but we are both resident in England? I have received conflicting advice by a lawyer.
Can anyone confirm whether the strategy is valid?

[someone]

I don't think that Scotland can be different to England in this regard because I don't believe Scotland has any powers to vary how IT is levied, only some powers to vary the rates. In particular, I think *how* the taxable income is calculated is a reserved power.

It _might_ be complicated by the different structures for actually owning property.

Note that s836 50/50 default requires that the property be held in joint names, it's not sufficient to be jointly beneficially entitled. (Anyway, nowadays, if the legal and beneficial owners don't match you'll have to register the trust.) As the property is unmortgaged it's easy to change the registration to tenants in common in unequal shares (England - I don't know what the Scottish equivalent is but I assume it exists - copilot says it's called pro indivisio ownership but I don't trust copilot that much)

The important point, and possibly why you've received conflicting advice, is that the legal ownership has to be joint.

Again, for s836 to apply, copilot says "both spouses’ names appear on the title sheet at Registers of Scotland."

[Abradacabadus]

They may not have power to set tax policy, but they have their own laws/legal system which can affect the tax position. Scottish law doesn't recognise the concept of beneficial interest and scottish property law varies massively from english property law.

You have likely received conflicting answers because scottish law is involved. While you will find an abundance of information on the position in England there is very little available online with regards to scottish law and much of what is available isn't reliable.

Who and where did you obtain conflicting opinions from? An accountant, a solicitor, online information or forums? If accountant or solicitor, were they England or Scotland based?

[someone]

They may not have power to set tax policy, but they have their own laws/legal system which can affect the tax position. Scottish law doesn't recognise the concept of beneficial interest and scottish property law varies massively from english property law.

If Scottish law didn't separate legal and beneficial interest then this guidance, for example, would be unnecessary:
https://revenue.scot/taxes/land-buildings-transaction-tax/lbtt-legislation-guidance/lbtt8001-trusts/lbtt8002-bare-trusts
It even uses the term "beneficiary" although it doesn't use "beneficial interest"

And Scottish law definitely has jointly owned property - and that's all that's needed for s836 to apply.

We are not talking property law here, we're talking income tax law, the OP is asking about the taxation of the income derived from the property.

The only bit I had to rely on copilot for was whether it was possible to have the equivalent of tenant in common in unequal share. I'd be surprised if it doesn't exist but it's possible that Scotland only has the equivalent of a joint tenancy and the only way to have unequal shares would be to have the property held in trust with a different (set of) trustees and then the beneficial interest split, with the trust listed as the legal owner on the register. (This is actually what happens in English law where the legal title is held as joint tenants while the beneficial interest can be held as tenants in common. The owners of the legal title end up at HMLR, just that usually they're also the same as the beneficial owners.)

[Abradacabadus]

If Scottish law didn't separate legal and beneficial interest then this guidance, for example, would be unnecessary:
https://revenue.scot/taxes/land-buildings-transaction-tax/lbtt-legislation-guidance/lbtt8001-trusts/lbtt8002-bare-trusts
It even uses the term "beneficiary" although it doesn't use "beneficial interest"

And Scottish law definitely has jointly owned property - and that's all that's needed for s836 to apply.

We are not talking property law here, we're talking income tax law, the OP is asking about the taxation of the income derived from the property.

The only bit I had to rely on copilot for was whether it was possible to have the equivalent of tenant in common in unequal share. I'd be surprised if it doesn't exist but it's possible that Scotland only has the equivalent of a joint tenancy and the only way to have unequal shares would be to have the property held in trust with a different (set of) trustees and then the beneficial interest split, with the trust listed as the legal owner on the register. (This is actually what happens in English law where the legal title is held as joint tenants while the beneficial interest can be held as tenants in common. The owners of the legal title end up at HMLR, just that usually they're also the same as the beneficial owners.)

You are demonstrating my point perfectly on how easy it is for people to get wrong. Try googling "does scots law recognise the concept of a separate beneficial interest" and read the results.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04441

This page states it is only property a person owns legally for IHT in Scotland, but doesn't explain why.

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9010

Or this page which explains some of the concepts and laww referred to by it don't apply in Scotland.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg33220

Or this page, which says;

The concept of beneficial ownership is unknown to Scottish law.

https://www.womblebonddickinson.com/uk/insights/articles-and-briefings/crossing-border-wealth-protection-england-and-scotland

Or this page which says;

Scottish law does not recognise the same division between legal ownership (by trustees) and beneficial ownership (by beneficiaries) which is a fundamental concept of trust law in England

https://www.rocketlawyer.com/gb/en/family-and-personal/manage-personal-property/legal-guide/legal-interest-and-beneficial-interest-in-property

Or this page which says;

The laws of Scotland do not normally recognise the concept of separate beneficial ownership (or interests) of such heritable titles

https://library.croneri.co.uk/cch_uk/irma2018q412/cg-cg33259

If you have a sub to the above you will see it says;

The concept of beneficial ownership is unknown to Scottish law.

Trust law in Scotland is different. You assume because trusts exist that it must follow the same rules/position as England but, as the links I have provided evidence, it does not. Because Scottish law does not recognise the concept of separate legal and beneficial interests.

[someone]

It's all moot.

If the property is held in joint names then s836 applies. The taxation of the income for the OP and their spouse from the property follows that and is, therefore shared 50/50 regardless of the actual income received by each of them. Scotland does not have the power to vary that (currently).

You seem to be asserting that it's impossible in Scottish law for the OP and their spouse to be jointly entitled to the income without being joint legal owners. So you're basically saying that my caveats about the registered title not being held by the OP and their spouse is impossible to happen.

Fair enough. Maybe that's the case. In England it's impossible for there to be more than four owners or a minor to be on the title register so we use trusts to deal with, for example, a minor inheriting a property. Scottish law presumably solves this problem differently but it really doesn't matter for the OPs question.

If you're saying it's impossible for the OP to transfer the property into joint names and retain 99% ownership in Scottish law then that's a completely different question and not what the OP asked. My googling suggests it's possible but that is Scots law, not UK law.

Of if you're saying that even transferring a 1% interest (which presumably is well below any LBTT threshold before it is due) will incur LBTT then that is also a Scottish law question but not the question the OP asked.

To quote the OP:

My specific question is: does the HMRC 50/50 spousal default rule apply given the property is located in Scotland but we are both resident in England?

[Abradacabadus]

Just so there is no confusion, I was only making the point that they do have their own laws and those laws can affect the tax position, even though they do not have power to legislate in that area other than setting their own rates and bands.

It can be difficult to find any reliable information online. Even when pages say the position is different in Scotland, they rarely go on to explain in any detail which might offer clarity. It can sometimes be difficult to get reliable information on the position in England, depending where you go for it. But in Scotland? Like a white elephant.

But it was your initial comment that Scotland doesn't have power over income tax therefore the position will be the same that spurred me. Because, as I explained, law regarding land and property is within their remit and taxation of land and property follows the country it is situated in so can indeed result in a different tax position. You can't just write a declaration of trust as you can in England.

[bd6759]

It's all moot.

If the property is held in joint names then s836 applies.

Therein lies the crux. The op says they are transferring 1%, but doesn’t say how.

There may, or may not, be a trust. There may be joint legal ownership. Facts are key.

There is the concept of express trusts in Scotland. It’s implied trusts that are generally disregarded.