By Simon Misiewicz
Article relevant to the tax year 2018/19
Are you thinking of using a partnership for your property business?
Did you know the may ways that you can use profit sharing to minimise your tax liability?
We have written serval articles about Section 24 and the impact of mortgage interest relief will have for property investors. As part of our tax efficient structures we have proposed that many property investors will need to incorporate their property portfolio. This is of particular interest to those investors that manage the tenants on a daily basis to justify to HMRC that they are active and therefore, a business rather than hold properties as an investment.
One of the ways that incorporation may be achieved is to use a partnership. For income and capital gains tax purposes, partnerships are regarded as being tax transparent ― i.e. they are not taxed in their own right but instead taxation is applied to the partners.
Accordingly, if the partners are individuals then much of the same considerations apply as for an individual personally purchasing an investment property. If the partners are corporate then they will be taxed as such. Where individuals and companies are in partnership together then the calculation of taxable profits must take into account differing rules for income tax and corporation tax.
Profits of a partnership are taxed as they arise and, as with the sole trader, it should be possible to obtain tax relief for interest paid on loans or other finance taken out to buy or improve the premises. Similarly, it should be possible for the partnership to claim tax relief for interest where capital is effectively being withdrawn from the business.
From 2017/18, relief for finance costs (Section 24 – F(No 2)A 2015, s 24) relating to residential property (in the UK or overseas) is restricted to the basic rate of income tax. The restriction is being phased in progressively over a four-year period with the full impact coming in 2020/21. See our spreadsheet to see how Section 24 affects you
These measures apply to residential landlords who are subject to income tax on their property income, although non-resident companies are only within the provisions if they act in a fiduciary or representative capacity. Therefore, trustees, personal representatives and individuals are affected.
Property partnership or joint ownership
Joint ownership of property does not mean that the letting activity will constitute a partnership. Instead, this will depend more on whether the letting itself is carried on in partnership. In fact, general law partnerships are not partnerships if all they do is carry out investment activities ― as one of the definitions of being in partnership is that the partners are in business together. Therefore, it will often automatically be the case that joint property ownership arrangements fall short of the degree of business involvement needed to be regarded as in partnership.
Normally, simple joint ownership will not be treated as a partnership and the taxpayer’s share of the income and expenditure from the jointly owned property will simply be included as part of their personal rental business. Indeed, it can often be beneficial to treat the income as arising outside of a partnership arrangement ― if it arises as part of a letting partnership then the partnership letting income and losses will be ring fenced from personal rental income / losses.
Whether or not a taxpayer is a member of a partnership depends on the facts. A partnership is unlikely to exist where the taxpayer is one of a group of joint owners who merely let a property that they jointly own. On the other hand, there could be a partnership where the taxpayer is one of a group of joint owners who:
- let the jointly owned property, and
- provide significant additional services in return for payment.
You can read more about the Partnership Act 1890 that illustrates if you have a partnership business or not in our article.
For income tax purposes, an individual’s own property business will generally be regarded as separate from any partnership property interest. Thus, if the partnership makes losses these will not be available to offset against rental income profits of the individual’s property business.
The only likely exception to this is where the property ownership arrangement is a joint ownership arrangement, rather than a true partnership.
Register for partnership
If you have established that you meet the criteria to be a partnership then you will need to inform HMRC. You can do this by submitting information onto the HMRCs website
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