Skip to content 
In UK, the legal provision concerning the occupational rent awarded under the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA) is defined under Section 13(6). This section of TOLATA addresses the payment made by one co-owner to another for exclusive use and occupation of the trust property. The taxation of such an occupational rent can often raise questions, especially when compared to the treatment of notional payments.
Occupational Rent and Notional Payments
At its core, occupational rent is a form of compensation for the non-occupying co-owner(s) that accounts for their share in the property’s use and enjoyment that they forgo due to another co-owners exclusive occupation. This concept is similar to notional payments, which represent hypothetical or assumed costs rather than actual cash transfers. Notional payments can cover a range of transactions, including the use of an asset owned by an individual or company without any actual cash changing hands.
In the context of equitable accounting, notional payments can be considered akin to occupational rent. Both forms of payment are compensatory in nature and aim to restore a fair balance between parties who have varying degrees of access to or benefit from a shared asset or resource.
Taxation of Notional Payments and Occupational Rent
According to UK tax law, notably the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), income from property, including rent, is generally taxable. However, the taxation of notional payments is more complex. While notional payments do not involve the exchange of cash, they can still be considered taxable income if they result in a benefit to the recipient that can be measured in monetary terms. The exact tax treatment of notional payments depends on the specific circumstances and relevant legislation, and professional advice should be sought to clarify the tax implications in each case.
Occupational rent under TOLATA operates somewhat differently. It is a clear, defined income stream received by a party in return for the use of their share of a property. As such, occupational rent is generally considered taxable income and should be declared in the recipient’s Self Assessment tax return for the relevant tax year.
How Occupational Rent is Taxed
The rationale behind taxing occupational rent in the year the other party enjoyed the benefits of exclusive occupation is that the recipient of the occupational rent essentially receives an income benefit during that period. This tax treatment aligns with the broader principle of taxing income in the year in which it is received or accrued.
This also explains why occupational rent does not fall under the category of non-taxable compensations. Unlike certain types of compensation, such as damages for personal injury, which are tax-free, occupational rent is not awarded to compensate for a loss or injury. Instead, it is a form of income that compensates the non-occupying co-owner for the use of their share of the property.
Understanding Equitable Accounting
Equitable accounting is a legal principle that helps ensure fairness between co-owners of a property when one party has exclusive use and enjoyment of the property. The concept of occupational rent falls under the umbrella of equitable accounting, as it compensates the non-occupying co-owner for their forgone benefits.
In this process, the court may order the occupying co-owner to pay an occupational rent to the non-occupying co-owner(s), effectively acting as a notional payment for the use of their share of the property. This rent is then often set off against any contributions the non-occupying co-owner should have been making towards outgoings such as mortgage payments, as seen in the Byford v Butler [2004] EWHC 2932 (Ch) case. It’s important to remember that while the idea of occupational rent rests on principles of fairness, the final decision lies at the discretion of the court.
Implications for Taxation of Occupational Rent
When it comes to taxation, the concept of equitable accounting is significant. The occupational rent received by the non-occupying co-owner is considered income derived from their share in the property. Consequently, it’s subject to tax as any other rental income would be.
Under UK tax law, the net rental income, which is gross rental income minus allowable expenses, will be added to the recipient’s other income and taxed at their individual income tax rates. This income should be reported on a Self Assessment tax return for the relevant tax year – the year in which the other party enjoyed the benefits of exclusive occupation.
Our Advice
The taxation of occupational rent awarded under Section 13(6) TOLATA 1996 is an area that requires careful consideration and understanding of several interrelated legal and financial principles. While occupational rent shares some similarities with notional payments, the two are taxed differently due to the actual cash benefit derived from the former.
Moreover, the principles of equitable accounting highlight the fundamental reason for the existence of occupational rent: to ensure fairness between co-owners when one enjoys exclusive use of shared property. Therefore, it’s no surprise that it’s considered taxable income, much like any other form of rent.
The complex nature of this area underscores the importance of seeking professional advice when dealing with issues related to the taxation of occupational rent or notional payments. Understanding the underlying principles and their implications can aid in navigating the complexities of TOLATA disputes and associated tax matters effectively. If you need help to file self assessment tax returns or Let Property Campaign disclosure, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.