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Unequal share of renovation costs - tax implications


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I am thinking about buying a property with a friend into which he will put slightly more in than me: 58% - 42%. We have agreed that the difference will be paid back through 'my time' as I will be carrying out the renovation work, management etc. We have agreed that we will be 50/50 owners and share the income/profits equally.

My question is, when it comes to the renovation work, if he puts up 75% of the renovation money will he offset the 75% against his share of his 50% of the income on his tax return or, as we are 50/50 owners, is the tax split 50/50 regardless of where the money came from? 

Also, if one of us uses a personal credit card to buy say a kitchen, will both of us be able to to offset 50% of the kitchen against our 50% share of the profits? or will the full amount of the kitchen only be able to be offset against the share of whoever used their credit card to buy the kitchen?

In an ideal world we would both have equal amounts of cash to put into a joint account from day 1 but I don't think that will be the case.... We have agreed that any difference in the renovation contribution will be made up through income so any shortfall at the start of the project will be seen as a loan. 

I hope this makes sense? Maybe I'm over complicating it but any help or direction on where to look would be greatly appreciated.

 

 

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31 minutes ago, debbie franklin said:

He would claim the 75% as he has incurred the expenditure unless you agree to reimburse him 25%

Thanks Debbie, we would have an agreement to reimburse the 25% but maybe not fully in year 1. How would that look in the eyes of HMRC? It sounds like it might get a bit complicated at the end of the first financial year. 

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36 minutes ago, dennis hughes said:

In which case most of the expenditure you are incurring will not be allowable against tax for either of you, regardless of who actually paid for it. IIRC the rules regarding this are grey, to say the least, but HMRC will consider that you do not have a business until your first tenant signs up. So, for example, replacement of a kitchen will be a capital item before the tenant moves in, but repairs (revenue) afterwards.

I am neither a lawyer nor an accountant. I would seek professional advice on this.

The property has been let and it is in need of a freshen up! Its replacing 'like for like' to bring the flat up to a modern standard for our new tenant. My understanding is that this is allowed. I have attached an allowable costs spread sheet that I have used for my previous properties and will use for any future (I think it came from this site). Let me know if this has changed. 2083454630_Allowablecosts.thumb.jpg.8aeb248bac214d91ce06988a30b1edeb.jpg

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7 hours ago, debbie franklin said:

If you will owe the money then you can claim 50% of the cost. If you use the cash basis you cannot claim it until you pay it.

Hi Debbie, thanks for all of your replies. If I can try and put what I think you are saying into a sum, can you let me know if I am picking you up right?

So:

I put £5,000 into the renovation budget and transfer it into our joint bank account.

My colleague puts in £0 but we have an understanding that he will owe me £2,500 which is to be paid back as a loan.

Our bank account will show that I have put £5,000 in to pay for the renovations. If this is all spent as revenue expenditure (allowable costs) and we have the receipts this can be offset against the tax, correct?

Now, if our rent returns for the year is (remember, I'm keeping the figures simple) £10,000, that is £5000 each as additional income that we declare on our tax returns. Can we each offset £2500 against our income regardless of who originally paid the money into the joint account? How will HMRC know that we have a loan agreement and we are in equally? 

Not sure if I'm over complicating this but I just want to make sure we get off to a good start without breaking any rules or making our tax returns any more complicated than they need to be.

Hope this makes sense?

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