I own a buy-to-let property with a friend – how do we slice up the rental income?

Q A friend and I have bought a property to let. We are paying the mortgage 50/50 but our deposit amounts are 80/20, therefore our splits come out at around 60/40.

I own the 60% share of property and would like your opinion on the correct way to split rental income from the property. The way I see it, should the property yield £1,000 a month in rent, I am owed 60% of this and my friend is owed 40%. Similarly, if we were both living there, as I own more of the property I would have the right to request a small amount of rent from my friend to compensate for the fact that she doesn’t own 50% and therefore must part rent from me.

However, the way my friend sees it is that if we rent out the property for £1,000, our total monthly mortgage repayment would be paid off first, say, £800 and then the £200 remaining would be split 60:40. I feel this is unfair to me and doesn’t reflect my larger share of ownership. Any help on this would be gratefully received. NA

A It’s not my opinion that matters, it is the opinion of HM Revenue and Customs (HMRC). It says that if a rental property is jointly-owned, the way in which the rental income is taxed will depend on the share of the property that each person owns.

As luck would have it, it has set out an example that is made for you and your friend: “Alice and Lucy are friends and invest in a flat together. Alice owns 60% of the property and Lucy the remaining 40%. The property is let out and in the tax year rental income is £8,400 and allowable expenses [such as mortgage interest] £4,600. This results in a profit of £3,800. The profit is shared as follows: Alice (60%) – £2,280; Lucy (40%) – £1,520.”

In your case, over a tax year the figures would be £12,000 rental income and allowable expenses of £9,600, giving a profit of £2,400, of which you get £1,140 and your friend £960. This assumes that the whole of the monthly mortgage payment is mortgage interest, as is typical on a buy-to-let mortgage. If it’s not, you have to work out how much interest you paid and how much was the reduction in capital, or ask your lender for the figures.

HMRC doesn’t have an opinion – but I do – on whether, if you both lived at the property, you should charge your friend rent. If it were me, I wouldn’t but if you did, you should also make sure that you paid 60% of the fuel bills, council tax and insurance and your friend 40%, rather than keeping things simple and splitting them down the middle.