Apportioning expenses when BTL is beneficially owned unequal

[shivtax]

Hello Taxationweb,

My husband and I receive income from a buy-to-let beneficially and unequally at 99%/1%, by trust deed. We pay the mortgage from a joint account, so my question is should we apportion the relief on the interest payments 50/50, or should we bias this relief 99/1 on our tax return? Is this also the case for expenses like property insurance and repairs?
Many thanks in adavnce.
Siobhann.

[Peter D]

The apportionment is 99 to 1 as per the Declaration of trust, as per all the ether expenses. Regards Peter

[maths]

This is a topic which in the past has resulted in much debate and, to some extent, disagreement. It's not perhaps as straight forward as often perceived (at least in my view !).

Is the legal title in joint names or just in one name?

If the former, have you filed Form 17?

If the latter (and there is no transfer into joint names of the legal title), the declaration of trust would declare the split of beneficial ownership of the property. In the absence of anything specific in the deed, the income would then be split in line with the declared percentages but any expenses would be deductible by the person incurring them. It may be that the deed also explicitly states the ratio of the income split and how expenses are to be discharged.

Is the rental income credited to a joint account out of which expenses are discharged or do you each take into your own accounts the income and then discharge expenses out of each account?

[section 44]

Agreed.

Where the declaration of trust only deals with entitlement to income/gains (as you would expect) then I do not see how a person could claim a deduction for a proportion of an expense that they have not actually incurred.

A follow on question is whether or not a co-owner could claim a deduction for an expense wholly incurred by him (i.e. whether or not a proportion of the expense would fail to be deductible for "wholly and exclusively" reasons). Perhaps it would make a difference if the co-owners disagreed on whether or not such an expense should be incurred at all (that would seem to negate the "wholly and exclusively" risk).

[maths]

Agreed.

Is this in relation to my comments?

I do not see how a person could claim a deduction for a proportion of an expense that they have not actually incurred.

They can't. I agree. Only exception is where a s837 election is in force which "deems" income to be split 50/50 irrespective of % ownership and which implicitly applies to expenses (ie split 50/50 irrespective as to who discharges the expense).

A follow on question is whether or not a co-owner could claim a deduction for an expense wholly incurred by him (i.e. whether or not a proportion of the expense would fail to be deductible for "wholly and exclusively" reasons).

Not sure I understand?

[section 44]

I was agreeing with maths' comments.

A follow on question is whether or not a co-owner could claim a deduction for an expense wholly incurred by him (i.e. whether or not a proportion of the expense would fail to be deductible for "wholly and exclusively" reasons).

For example, if Mr A owns a property jointly with his girlfriend Miss B and they agree to share income 20:80 then if Mr A incurs £100 paying (in full) for a property repair then clearly £20 is deductible but is the other £80 also deductible? Has Mr A incurred the other £80 wholly and exclusively for the purposes of his property rental business or (at least in part) for some other reason such as personal reasons connected to his relationship with Miss B? On an arm's length basis you would not expect Mr A to pay any more than £20, but perhaps that illustrates why he may have a problem deducting the other £80.

[maths]

For example, if Mr A owns a property jointly with his girlfriend Miss B and they agree to share income 20:80 then if Mr A incurs £100 paying (in full) for a property repair then clearly £20 is deductible but is the other £80 also deductible? Has Mr A incurred the other £80 wholly and exclusively for the purposes of his property rental business or (at least in part) for some other reason such as personal reasons connected to his relationship with Miss B? On an arm's length basis you would not expect Mr A to pay any more than £20, but perhaps that illustrates why he may have a problem deducting the other £80.

An interesting point; my view is as follows.

Assuming that A and B agree to split income 20/80 and expenses 20/80 (which wouldn't be unreasonable) then A in your example can deduct the 20 (ie his share of the 100 expense) but not the 80. The 80 has been discharged by A on behalf of B as under the agreement expenses are to be borne 20/80.

B can deduct the 80 but is in debt to A for the 80.

The 80 A incurred was not "wholly and exclusively" incurred by him in respect of hisproperty business albeit for the property business.

If, for whatever reason A and B agreed income split 20/80 but no mention is made of any expense split, I would still argue that they are not each free to discharge expenses in any old manner and that for tax purposes prima facie in the absence of any other evidence to the contrary expenses should follow the income split; hence, same result as above.

[section 44]

What about if A and B disagreed over whether or not to pay an expense?

For example, suppose that an existing tenant renewed a lease to stay on for another year and the letting agent sought a fee in respect of the renewal. On a strict reading of the contract with the letting agent, A considers that the fee is properly payable and wants to pay it. However, following the Foxtons case, B does not think that such a contract term is enforceable and does not agree that a fee is due and does not agree to pay the fee. If A pays the full amount of the fee, can A deduct the whole amount?

[maths]

Assuming HMRC argue that the fee (as you indicate) based on Foxton is not legally due to the agents under their contract then (in HMRC view) any payment thereto would thus be in effect gratuitous and not deductible irrespective of who paid it.

If HMRC accepted that the fee was legally due then A would be able to deduct 20% and would have discharged 80% on behalf of B who could deduct the 80% but would owe A for it.

If B still held that HMRC were wrong in their view (on the facts specific to A and B's position) and thus refused to repay A for the 100% A discharged, B would ultimately be denied his 80% deduction has he will never have actually incurred any expenditure and A would still only be able to deduct 20% being left to sue B for the 80%.

[section 44]

Trouble is though, are HMRC likely to opine on a matter of contract/consumer law? Whether or not the fee is due is unlikely to be resolved in court given that the agent would have his fee (albiet from A) and so would have no basis for pursuing B.