Splitting income, expenses and wear and tear allowance calculation

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    Splitting income, expenses and wear and tear allowance calculation

    One son is a student who owns 50% of a house he was living in with 3 tenants. My husband and I own 25% each. We were told by accountants and then by an HMRC adviser at a Landlord Expo that we had to split income according to ownership. I now learn that this can be changed. Is it too late to change for previous tax year (2012-13) and how would we do that?
    Or is it too late to change for 2013-14?
    Do utility bills and other expenses (advertising for tenants, insurance and ground rent come to mind) have to be split the same way?
    Is it possible to allocate the wear and tear allowance in a different way from the income, i.e not to offset it against our son's income?

    #2
    How is the current rental profit being taxed?

    What change(s) in the profit sharing ratio do you want?

    Comment


      #3
      It is the profit which is split according to the ownership, and not the income. This means that the expenses as well as the income are split according to the ownership.
      The split cannot be done in retrospect because you are gifting a share in the property which obviously be done according in retrospect.
      If you or your husband gift a share of the property to your son there will be a capital gain on the gift (dependant on values of course)
      I am assuming this is how you want to do it because your son will qualify for PPR.
      You must of course be aware that if you gift the property to your son so that he will be eligible for PPR, then he can do with the property what he likes. The way round this is to put the property into a trust. There are capital gains tax implications for doing this, but you will need to speak to a tax advisor or accountant who specialises in that area.
      So the short answer to your question is, yes the expenses are split according to the ownership and no, the change to the split cannot be done in retrospect. - Graham

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        #4
        Kiing_Maker - at the moment the profit is taxed 50% our son's and 25% my husband and 25% myself. But out of the gross income we have to take the utility bills as well as insurance etc. (I have accounted for the fact that our son effectively used 25%). I was hoping that we might be able to just allocate some of the expenses and the wear and tear allowance 50:50 my husband and myself.
        We are not keen at this stage to change the ownership. Apparently, according to HMRC, who I just contacted on the phone, we can make an election to create tangible ownership differently from legal ownership. But this had to be done ahead of the financial year and not in arrears. So HMRC goes by what the advisor called beneficial rather than legal owership.
        I think we'll do this for next year but we are stuck with what we've got. Which seems to me that our son has 50% of the income but I think I read somewhere that if expenses are out of parents bank account and receipts marked according to who paid them the expenses don't have to be distributed the same way?? Still don't know about wear and tear allowance tho. Or does he have to be allocated 50% of expenses and wear and tear allowance. He doesn't pay taxes and we are paying fees for his masters course so he is genuinely in receipt of that extra profit.
        I also think from what I have read that PPR doesn't wholly apply because he had 3 tenants and so part of the house was not used for his own private residential occupation. But he should get some private letting relief?
        THANKS AS EVER FOR THE HELP

        Comment


          #5
          As graham123 has said, it is the profit which is shared.

          You can be reimbursed for paying your son's share of the expenses via your Capital accounts. This is one of the occasions when a Balance Sheet is more or less essential.

          The 10% W&T allowance is after payment of utilities, council tax and other expenses which the tenant would usually pay for.

          The Beneficial ownership can be changed at any time, via a DoT (Declaration of Trust) - the CGT position should be reviewed beforehand.

          Comment


            #6
            What would be included in Capital accounts?
            Can I pose a hypothetical scenario:
            Say for example the gross income is £12000. After deduction of 75% (the tenants share) of the C tax and utility bills it is £8000.
            so we can divide the gross income to myself £3000, my husband £3000 and our son £6000. after bills 2000:2000:4000. giving wear and tear allowance of 200:200:400.
            But could we instead allocate such that wear and tear allowance is 400:400:00 OR
            can we divide the income after bills as 1000:1000:6000 and w&t as 400:400:00 (unlikely I presume) OR same share of income with w&t as 200:200:400.

            I think we'll leave the distribution of ownership as it is and hope our son has enough income from employment next tax year to benefit from our government's generosity in increasing the personal allowance!!

            Comment


              #7
              I am a bit confused.

              What is tenant paying for, apart from the rent?

              Comment


                #8
                The gross rental income includes gas, electric, broadband, some Council tax and water rates. The above figures are hypothetical, not actual. BUt in my calculations I am assuming that the rent covers 75% of these as our son is living there so using 25%.
                After we deducted those to get what I am calling £8000 we are also paying insurance and ground rent and wear and tear.

                Comment


                  #9
                  I think I understand.

                  The 10% W&T will be £800 (being 10% of the adjusted rents). Insurance, repairs etc will also be deductible.

                  The net profit would then be shared 50:25:25.

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