How do I claim back the 25% of Residential Finance cost under Section 24 when I am in a Property Partnership?

by Readers Question

3 months ago

How do I claim back the 25% of Residential Finance cost under Section 24 when I am in a Property Partnership?

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How do I claim back the 25% of Residential Finance cost under Section 24 when I am in a Property Partnership?

My wife and I established a partnership with HMRC in 2012 when we started a small business – which currently involves renting out two residential properties in Plymouth. Being retired our only other income is from UK pensions, so we are basic rate taxpayers. As my wife does the bulk of the work and made a substantial contribution to our investment we normally use the paper partnership forms to divide the profits 90% in her favor and 10% to me. This also helps to keep me away from higher rates of income tax!

Using this system, we calculate our share of the profits and proceed to undertake our individual self-assessments on-line. We quickly found out in 2012 that, when starting the self assessment process, if we ticked the box to say we were in a partnership and ticked the box to say that we had income from property, then we had basically entered our figures twice. We phoned HMRC and a representative advised us to just enter our income, expenses and profits on the SA800 form, to complete an SA 801 to enter our profits in the Partnership section and not to tick the ‘Income from Property’ box when completing self assessment. This has worked fine up until this year!

But, with the changes to Residential finance costs (25% not being included this year) we were keen to try and find out how we could claim back the 25%, albeit at the basic rate of tax. Three phone calls later and two conversations with a tax technician called Paul left us thinking that maybe we should not have started a partnership in the first place?

I have experimented with my on-line self assessment and if I now tick Income from Property and do not declare that I am in a partnership then finally I get the opportunity to claim back my share of the Residential finance costs not included in Loan Interest and other financial costs.

Everything that I read on your excellent website tells me that it is quite common for partnerships to be established for dividing up profits from residential rental income. So, I am assuming that my wife and I are not the only people with the problem – that is that if you declare your profits as a partnership, you have no way of claiming back your share of the Residential finance costs not included in Loan Interest and other financial costs.

Or have I missed something?

Martin



Comments

Mark Alexander

3 months ago

Hi Martin

I suspect many landlords will have the same question when they get around to completing their Partnership Tax returns. I have to commend you for being ahead of the game, as most landlords are unlikely to even think about completing their 2017/18 returns until at least Autumn. They must, of course be filed by the end of Jan 2019 in order to avoid penalties.

Whilst we help many landlords to set up and register partnerships, we don't deal with tax returns. Instead we leave these to our clients accountants. However, as this is likely to be a topic of such huge interest, especially as many landlords do their own tax returns, we decided to pay our own accountants to answer this question for you, and doubtless many others who will be equally confused. Accordingly, this discussion thread will hopefully become a useful reference point for many landlords. We encourage all who find the detailed response below to leave a donation to help us to recoup the costs of the advice we have sought for our community. Please see our donations page at https://www.property118.com/donations/43590/

The response below is from our accountant, Neil Barlow FCA AAT at Pacific Limited Chartered accountants. You can see his member profile and a contact form via the link below.

https://www.property118.com/member/?id=452

Neil's response ....

Martin mentions that he has experimented with his on-line self assessment. I would suggest that he experiments with the on-line Partnership self assessment first. We use bespoke software and therefore I cannot confirm how the HMRC online system should be completed. However I have looked at the paper forms and the boxes to be completed are as follows:

Please see below a link to a copy of the Partnership UK Property Tax Return form SA801 which is completed with the Partnership Tax Return SA800 .

https://www.property118.com/wp-content/uploads/2018/04/sa801-2018.pdf

75% of the finance charges are included in box 1.27 which flows through to the profit or loss figure shown in box 1.39. The 25% non allowable finance charges are included in box 1.40.

Also linked below is the Partnership Statement (Full) form SA800(PS).

https://www.property118.com/wp-content/uploads/2018/04/sa800ps-2018.pdf

The rental profit or loss from box 1.39 is entered in box 19 and then split between the partners in accordance with their profit sharing arrangement. The 25% non allowable finance charges entered in box 1.40 are entered in box 26 and then split between the partners in accordance with their profit sharing arrangement.

These figures flow through to the partner's personal tax return and are entered on the Partnership (Full) form SA104F linked below.

https://www.property118.com/wp-content/uploads/2018/04/sa801-2018.pdf

The partner's share of the rental profit is entered in box 36 (which then flows through to various other boxes). The partner's share of the non allowable finance charges are entered in box 41.1.

I hope the above helps.

Neil Barlow - https://www.property118.com/member/?id=452

Simon Lever

3 months ago

Once the 25% non allowable interest has been transferred to the personal tax returns the calculation of the tax due will allow 20% of the interest as a deduction against the tax calcualted.
If the both Martin and his wife are basic rate tax payers before the 20% deduction on their disallowable interest then they are in the same postion as they were last year.
If they are not both basic rate taxpayers then as they are a registered partnership submitting partnership returns they do not have to keep the 90:10 profit sharing ratio but can change this at will. A change in this ratio should be able to bring both of them back to the basic rate tax situation.
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

There may be other reasons not to change the ratio but this will work.

Maybe a one off consultation with an accountant would be cost effective.

Martin Mills

3 months ago

Dear Mark,
Thank you for posting my original query regarding how to claim back the 25% of Residential Finance costs not included in Finance charges. Thank you also for asking Neil Barlow to look at this on behalf of all landlords who have partnerships registered with HMRC.
Neil is obviously on the ball. Yes, the 25% figure goes in Box 1.40 on form SA801. Neil also provides a link to down load the new form SA800(PS). All landlords in registered partnerships need to know that this new form is the vehicle by which partners can lay out their share of profits (Box 19) and their share of the 25% of residential finance costs (Box 26). My understanding is that landlords who have a turnover of less than £85000 need not do a full partnership return if they complete the paper return SA800(PS). It took me two phone calls to HMRC to find out that they had created this new form. I have to say that the staff at HMRC are not particularly geared up to the changes that have come about since George Osborne gave us Section 24. Two have said to me that ‘this is all new to us’, even though the legislation came in two years ago… I myself am not a tax expert. But, just somebody who wants to get things right.
My wife and I are retirement/hobby landlords. We do everything that we can to provide quality housing for the young people that we let to. We like to keep our properties well maintained and build positive relationships with our tenants. We enjoy getting Christmas cards from our tenants thanking us for everything that we do for them! Like many of you, we are tired of landlord-bashing. This country needs a responsible private rented sector because successive governments have failed to provide adequate social housing and historically are to blame for selling off the housing stock that they had.
As Simon Lever rightly points out, as basic rate tax payers, my wife and I are basically unaffected by Section 24, but we do have empathy with career landlords who have seen their business models shattered. I believe that to target landlords in this way undermines all the basic principles of business, profit and taxation… Thank you George Osborne. Such a shame you didn’t focus your attention on some of the big multi-national companies that make such large profits and contribute little to our economy.
Returning to tax returns! I have posted off our partnership form SA800, with SA801 and SA800(PS) to HMRC. I included a covering letter explaining that, whilst we are in a partnership, we would not be declaring any profits in 2017/18 because, through the individual self-assessment process, we fail to see how it is possible to claim back the 25% of finance costs. Both our individual profits will be declared using the UK Property section of on-line self-assessment, whereby the 20% tax- relief can be claimed. Thanks to Neil again, I do understand that there might be software available to help landlords through the partnership tax return process, but personally, we would not wish to purchase them and, like many small landlords, we will continue to self-manage our properties, our accounting and our tax returns. I sincerely hope that HMRC will respond quickly to our query and look forward to updating readers with the outcome. With best wishes to all responsible landlords.
Martin

Simon Williams

3 months ago

Forgive me for being way behind the learning curve here, but I thought HMRC got a bit sniffy about married couple property partnerships, claiming that you had to show you were doing a lot more than just renting out property 'in the normal way'? Perhaps they have now relented on that.

Rightly or wrongly, I have gone down the path of a deed of trust to transfer a larger-income rental property to my wife to utilise her below-higher-rate status. Easy to do at least and then it's just the Land and Property pages for each of us.

But am I right that the big advantage of a partnership (for actual/potential higher rate payers) is that, after a period of time, you can then incorporate and avoid SDLT?

Mark Alexander

3 months ago

Reply to the comment left by Simon Williams at 30/04/2018 - 11:52
Hi Simon

You are right on all counts.

If you are not running a 'business' then you cannot form a partnership. HMRC's definition of 'business' for property investment partnerships can be found at PIM1030 - see link below.

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

But also see PIM1020 - link below.

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1020

I confirm that partnerships are given preferential treatment in regards to SDLT when transferring the 'whole business' to a company. The legislation is linked below.

https://www.legislation.gov.uk/ukpga/2003/14/schedule/15

I hope that helps.

Simon Williams

3 months ago

Reply to the comment left by Mark Alexander at 30/04/2018 - 12:07
Thanks Mark for these excellent and useful links. I seem to have terrible trouble finding these HMRC manuals. Simon


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