Splitting rent and expenses for joint tenancy between non-married landlords?

by Readers Question

3 years ago

Splitting rent and expenses for joint tenancy between non-married landlords?

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Splitting rent and expenses for joint tenancy between non-married landlords?

I have a BTL mortgage property jointly with my brother (i.e. we are not married as I know the rules are different for married people). It’s a joint tenancy, not tenants-in-common.

We intend to split the rental income and expenses (via beneficial interests, and we will draw up an agreement to make this clear).

The split will be 80-20 so that he receives 80% of income (and I think would have to pay 80% of expenses?) and I receive 20% of income (and so pay 20% of expenses for tax purposes?). The differential split is based on the different contributions to the deposit we made. I have read this PIM http://www.hmrc.gov.uk/manuals/pimmanual/PIM1030.htm

I’m just confused about how we should do this 80-20 split of income/expenses in practice:

1. Does splitting the rent have to be done when the tenant pays us both? i.e must the tenant pay 20% of rent directly to me and 80% to my brother? Or is it okay for tenant to pay 100% to one of us so it’s easy, and then between ourselves we redistribute the money so it’s 80:20 overall?

2. I understand tax-deductible expenses need to be apportioned in the same proportion as income – correct?

3. Similarly, can one of us pay a repairman fully for repairs (assume it can be deducted against income tax as they’re not capital renovations) and then between ourselves one of us brothers will pay the brother who paid out back so it’s still a 80:20 split of expenses?

Or must one of us pay 80% to the repairman and the other brother 20% if we wish to claim the respective amounts against income tax on our returns?

Also, any suggestions about the best way to handle money going out and in with a joint tenancy like this would be welcome – would a joint bank account specifically for rental income/expenses be best (e.g. for future HMRC audit reasons) or would it be okay to have individual accounts for our respective property activities (I think I prefer that to minimise mingling our credit histories together) Splitting rent and expenses for joint tenancy between non-married landlords?

We’re not a commercial partnership as we only have the one property and no immediate plans to get another. I would be extremely grateful for any advice.

Thanks!

Martin



Comments

Mark Alexander

3 years ago

Hi Martin

This is far more simple than you seem to think, but first please allow me to correct you on a misunderstanding regarding partnerships. Even without a partnership agreement, the fact that you jointly own a rental property means, in law, that you are running a commercial partnership and that you are jointly and severally liable.

All you really need is a joint bank account for your rental property, it doesn't even need to be a business account, any joint account will do. The rental income is paid into that account and all expenses associated with the property should be paid from that account. When you do your tax returns the shares of any rental profits/losses are proportioned accordingly.

With regards to structuring the ownership of the equity in the property, and the profits, often the most effective way to do this is via a Declaration of Trust as it requires no change to the legal ownership structure registered at HM Land Registry. Please see >>> http://buytoletconveyancing.co.uk/ - it should cost you no more than around £200 + VAT to sort this out, including the drafting of the documents and fully insured legal/tax advice.
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matchmade

3 years ago

I agree with Mark. You are adopting all the right principles, but to simplify the administration, just run a joint bank account to handle all income and expenses, then distribute the net profits (if any) once or twice a year in the right proportions according to your agreement. Make sure you have a profit-sharing agreement signed by both of you to show to HMRC, in case you are ever investigated by them.

In terms of tax returns, there are deductions such as running a home office or vehicle mileage which you could both claim against the income, but again you should make sure you can demonstrate that the deductions are fair and proportionate between the amount of work done by each of you.

Have you a signed agreement with your brother to determinate what happens if there is a point of disagreement? For example, what happens if the roof needs replacing, wiping out your accumulated profits over several years and requiring an injection of capital from both of you? Does it say anywhere that the contribution should be in proportion 80:20 too? What if interest rates zoom upwards, until the payments exceed your rental income and you both have to put money in to cover the costs? And how are the capital gains going to be split if you decide to sell or buy each other out? You may be 50:50 co-owners on the title deeds, but have you a written agreement that gains/losses are to be split 80:20 as well?

I only ask because no matter how well you get on with your brother, there are many examples of things going wrong in this kind of arrangement, usually when something unexpected happens.

ED SHIRMAN

3 years ago

Hi Martin ,
I have been doing this set up for about 12 years now , with both of my brothers and my late father too.
All the comments made so far are totally valid , particularly making things clear as to the split of revenue and expenses , in case the relationship between you is not as harmonious as it is now .
If you are excel familiar , set up a sheet to record all rents received and expenses , which you can set out in the headings to tie in with the tax return , and at the bottom , split the the totals in the % ownership you have agreed . I have done this and it works perfectly . I do a 3 monthly sheet so the number of entries are more manageable and you both see how things are going regularly . It may be in a quarter the net figures are negative because of an unusual heavy expenditure , but just means a contribution is required . Enter the quarterly sheets onto an annual summary sheet and you are all ready for the tax return and not trying to do it all at the end of the year .
If you are not excel savvy , email me and I will let you have my master sheet to work from . I use this arrangement on a company basis too for properties owned by 4 companies in varying percentages . I personally just use my bank account for my personal portfolio of 12 properties so my attention is focused only on one account , but set up a new account if you prefer . I hope this helps .

I have an extension to this:

I am one of three owners of a BTL property. One of the owners does not have a mortgage (paid cash for his share).

Am I amble to apportion allowances on a varied basis. For example, we would each pay 33% of the insurance and therefore all deduct it, however they wouldn't be able to deduct for mortgage interest.

It feels like something that's easiest done by splitting the rent at the gross stage, and all applying our own relevant allowances to calculate individual profit (and Therefore tax)

Mark Alexander

3 years ago

Reply to the comment left by "Alastair McGeorge" at "20/07/2015 - 19:28":

This is something you would need to take professional advice on
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David Hood

3 years ago

I concur with Mark's initial comments, I have had an informal partnership with a friend for 8 years, we own and manage 5 BTLs in Scotland, run it from a joint bank account quite separate from our personal finances, and use a simple spreadsheet to allocated the tax liabilities equally.

The question I'm considering now is how to manage the equity in the event of one of our deaths. Our respective spouses would not want to continue the business, and ideally we would like the surviving spouse to get half the equity without the surviving business partner selling up.

Are there any specialist life insurance products that would allow my friend and I to insure each other, with the proceeds being for the sole purpose of 'buying out' the surviving spouse ?

Mark Alexander

3 years ago

Reply to the comment left by "David Hood" at "02/10/2015 - 18:06":

Hi David

There are indeed such specialist insurance products.

If you look at our Members page and do a search for Howard Reuben, he is a specialist in this area of advice, IE insurance, partnership protection and estate/legacy planning.

Please let me know how you get on when you contact him. He has a contact form in his member profile.
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