Benefits of a family partnership we had not previously considered

by Readers Question

17:22 PM, 6th December 2019
About 2 months ago

Benefits of a family partnership we had not previously considered

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Benefits of a family partnership we had not previously considered

When my twins turned 18 years old I made them both partners in my property rental business and gifted 1% of the beneficial interest in my properties to each of them. We then registered a Partnership with HMRC, which meant I could allocate profits disproportionately to ownership by granting ‘Partners Salaries to each of my children.

The HMRC manual states….

“It is not a requirement of a partnership that each member is physically capable of performing the full range of the activities of the partnership business, but each must be capable of performing a part of the activities”

It goes on to say …

“There may be occasions when a person is described as a partner but is, in actual fact, an employee of the business. For example, the title may be given for prestige. ‘Salaried partner’ is the term usually used to describe such an employee. It is important to be aware, however, that the term may also be used to describe a person who is an actual partner, rather than an employee. For example, the term may be used to describe a partner who receives a first share of the firm’s profits. Whether or not a person is a partner or an employee will depend on the facts.”

My children are most definitely Partners in the true definition as opposed to being salaried employees with the title of Partner because:-

  1. They own a stake in the business and hence they are ‘co-adventurers in business’
  2. They share income, expenses, profits, losses and risks
  3. They are taking an increasingly active roll in the business and will take over completely when I eventually retire

The purpose of forming the Partnership was for business continuity and legacy planning, but it also had tax benefits for me. I have since been allocating profits between the Partners to utilise all of our basic rate tax bands, by granting a ‘Partners Salary’ to my children. This has resulted in me not being affected by the Section 24 restrictions on finance cost relief. Furthermore, the twins are retaining profits within the business, so the value of their capital account is growing whilst mine is either stagnating or reducing. This is also beneficial for IHT planning purposes.

The benefit we had not considered when we completed this planning is that the twins now have a track record of substantial income, which has enabled them to be able to secure a mortgage to buy their own first home. Without being Partners in the business, this would not have been possible for them. There are not many youngsters who are still at Univerity and yet qualify for mortgages to buy property in their own name, but thanks to the guidance given to me by Property118 my children will soon have a foot on the housing ladder themselves.

For anybody who is considering a tax-planning consultation with Property118 I highly recommend it.

Jayne

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Comments

Cathie Hawkins

12:49 PM, 9th December 2019
About 2 months ago

Hi Jayne. I have had a tax planning consultation, which was excellent and was advised to do as you have done. However I am struggling to get my head around the details of the accounting side. Would you be willing to act as a mentor for me to get going? I don’t feel I can keep asking Mark, as I’m not even sure what questions I need answered! I want to ‘jump in’ but have refrained from doing so in case I do it wrong.

Austyn at H D Consultants

14:05 PM, 9th December 2019
About 2 months ago

Very Interesting. Starting an income trail for your children before they earn an income. I often wonder about starting a pension for my 2 year old now. when shes 55 and can draw on it, she will be able to do whatever she wants!
First time buyers, although helped greatly by lenders and gov schemes alike, still struggle to get onto the property ladder so this is a great thing you have done for them. 🙂

Mark Alexander

14:58 PM, 9th December 2019
About 2 months ago

Reply to the comment left by Cathie Hawkins at 09/12/2019 - 12:49
Hi Cathie

Jayne uses the same accountants as I do.

Please feel free to email as many questions to me as you like, and I will also be very happy to introduce you to the same accountants that Jayne uses.

Mark Alexander

14:59 PM, 9th December 2019
About 2 months ago

Reply to the comment left by Austyn at H D Consultants at 09/12/2019 - 14:05
I don't think children are allowed to have a pension are they?

Austyn at H D Consultants

15:10 PM, 9th December 2019
About 2 months ago

Reply to the comment left by Mark Alexander at 09/12/2019 - 14:59
Fair comment Mark, I don't actually advise on pensions but I was pointed to this article by a pension adviser, as dad to a 2yr old, I'd love to leave a pension behind for her... https://www.moneywise.co.uk/pensions/manage-pension/start-pension-your-child

Dino

15:48 PM, 9th December 2019
About 2 months ago

Reply to the comment left by Mark Alexander at 09/12/2019 - 14:59
They can - set one up recently for my 14 yr old. He's thrilled! Not sure why I hadn't realised it could be done sooner, so my daughter missed out completely.
One thing to note is that they'll be older than 55 when they can get it and by the time it comes round, could be a lot older. Still a good way to start them thinking long term.

Mark Alexander

15:52 PM, 9th December 2019
About 2 months ago

Reply to the comment left by Dino at 09/12/2019 - 15:48
Really?

And why will they have to wait until later than age 55? This is a private pension, so minimum retirement age is 55 unless they have a special exemptions, eg sports professionals such as footballer can draw their pensions much earlier

JB

21:52 PM, 9th December 2019
About 2 months ago

Reply to the comment left by Cathie Hawkins at 09/12/2019 - 12:49
Hi Cathie
I know how you feel! I had to read and re-read every linked article on the main Tax page several times, and watch all the video presentations several times too before it sank in. I was also lucky enough to see Mark Alexander and Mark Smith do a presentation in London - which was well worth the trip into town.
I decided to change accountants to Pacific as I was worried that my previous accountants wouldn't understand what I was trying to achieve. That was a good move as I haven't needed to explain anything to them and just leave them to it.
Be brave!

JB

21:56 PM, 9th December 2019
About 2 months ago

Reply to the comment left by Austyn at H D Consultants at 09/12/2019 - 14:05
Why not invest in a Junior ISA?

Austyn at H D Consultants

22:13 PM, 9th December 2019
About 2 months ago

Reply to the comment left by JB at 09/12/2019 - 21:56
I was just thinking that maybe having this pension pretty much untouchable, running until she is 55, means I could then pass it over for her birthday and hey presto, happy retirement. (I'm planning to still be around!)

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