I own a flat astenant-in-common with my mum. We rent the flat out and my mum has all the money from the rental, as thisis how we set it up and it is beneficial for ustax-wise. My mum now wants to gift her share of the flat to my daughter (i.e. her granddaughter), who is a toddler now - the idea being that we continue to rent out the flat and the income will now be my daughter's income and she therefore will be paying tax on it. Will this work? I am unsure because I know that if I gift my share of the flat to my daughter, the income will be considered my income for tax purposes. I understand that we will need to set up a trust for my daughter (who cannot own a property herself) into which the share of the flat will be transferred.

Arthur Weller replies:
The transfer from your mother to your daughter will work for income tax purposes. Half the rental income from the property will go to your daughter and will not be taxed on you underthe ‘settlements’ income tax anti-avoidance rules. However, HMRC is likely to have a different opinion about the other half of the rental income. HMRC are likely to be of the opinion that the agreement that you had with your mother that all the rental income should go to her has now come to an end, and if you would want to continue such an arrangement with your daughter (i.e. that all the rental income should go to her) this is a new agreement, and your 50% of the rental income that you are now diverting to your daughter should be taxed on you, under the settlements rules. Whether HMRC would be successful in such an argument is not clear.