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Do I have to disclose rental income on my tax return?

My wife owns a flat, which she bought with a mortgage before we met. She subsequently re-entered higher education and the flat is being rented out to support her financially while she studies. If we buy a house to live in (which we will jointly own), we may remortgage the flat as a buy-to-let. However, because of our current income disparity, the bank insists upon a joint mortgage on the flat, which they say will require my name to be added to the deed and a transfer of equity. If this happens, can my wife continue to solely disclose the rental income on her tax return, or would HM Revenue & Customs compel me to disclose some share of it? Are there any other tax considerations?

Vanessa Lee, tax partner at accountancy and business advisory firm BDO, says it is great that the flat is enabling your wife to resume her studies, but you are right to be conscious of the wider implications.

If the flat is held by you as joint tenants, the rental income will automatically be split equally for tax purposes unless a “Form 17” election is jointly made to tax the income based on the actual proportion of your beneficial entitlement.

The split will be based on the proportion of the property you each own (such as 80:20) and you may need to provide evidence to HMRC showing the uneven split, such as a deed of assignment or a signed declaration from you both stating your beneficial interests in the property and the income arising from it. Each share of the property will automatically pass to the surviving spouse should one of you die.

If you hold the flat instead as tenants-in-common, the rental income will be split based on your actual ownership and no election would need to be made to tax the majority of the rental income on your wife, assuming she holds a majority share of the flat. On death, each share of the property will pass in accordance with each of your separate wills.

You would need to seek further advice from your mortgage providers regarding how feasible it is for your wife still to hold a majority share of the flat. If it is possible, a Form 17 election for joint tenants, or holding as tenants-in-common with the majority of the rental income being taxed on your wife, would then be useful if your wife is taxed at lower income tax rates.

Your individual shares of the rental profits will need to be reported to HMRC if they exceed the annual £1,000 property income allowance. Tax you owe on rental profits of up to £2,500 can be collected through your PAYE tax code but for higher amounts, you will need to complete a self-assessment tax return and pay in a lump sum.

There would be no immediate inheritance tax or capital gains tax consequences as transfers between UK-domiciled spouses are fully exempt for IHT purposes and take place at no gain or loss for CGT purposes. On death, any remaining mortgage secured on the buy-to-let flat will reduce the taxable value of the flat in the estate.

I am in my late 70s and need to update my will. Two years ago I had a falling out with my son and his wife, and we have not spoken since. Despite my best attempts, we have not reconciled. I would like to leave something to their two small children but intend to cut my son and his wife out of my will. Ideally I would like to make very plain why I have done so. I have heard, however, that wills are public. Is this true, and if so could I make my will confidential?

Lilly Whale, an associate in the private client team at RWK Goodman, says navigating family rifts in the context of inheritance is often delicate. Although in England and Wales you are free to leave your estate to whomever you please, cutting out family members is not without risk.

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It is paramount you know that after you have died your will becomes a public document on the grant of probate being issued. The limited exception is where a grant is not applied for because the estate is very small or passes entirely to the surviving spouse. Although I will assume that neither applies here, you should know that in these circumstances the executors would ordinarily still show the will to its beneficiaries.

Since you can leave a legacy to your grandchildren and not your children then — assuming there is no challenge to your will after death — the crux is whether to elucidate on the argument in the will. You say that you have not reconciled. Could this be feasible in a few years’ time? Would it then be fair on your grandchildren to see plain evidence of this acrimony?

Although it is not unheard of for testators to include a clause stating the reasons why a relative was cut out, I recommend that the more sensible option is to record your thoughts on the relationship breakdown and your son’s disinheritance in a separate letter of wishes.

A letter of wishes is confidential to your executors and will not be published on the grant’s issue. Of course, you may decide to pull no punches in a letter of wishes and your feelings may still be explicitly expressed.

However, since it would stay in your executors’ hands, your grandchildren (or indeed anyone else) may never know how deep this familial rift ran, particularly if you specifically tell your executors that you do not want anyone to see or know of its contents. It would also provide clarity to your executors about why your son will not receive any share in your estate.

Further, a letter of wishes can be updated at any time without impacting your will’s validity. Accordingly, if in future relations improve and your feelings soften, you can completely rewrite the letter without having to prepare a new will. If this occurs then I would still advise having a letter of wishes in place as cutting out your son could still be a surprising decision to those unaware of the dispute.

I sympathise with your situation and do not underestimate how difficult this must be. However, I would strongly urge against recording your anger in a document that could end up in a public forum. You can all but guarantee this will do nothing to calm emotions when you will no longer be there to rationalise your decision.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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