Forming a partnership and description of trade?

by Readers Question

18:44 PM, 6th April 2017
About 2 years ago

Forming a partnership and description of trade?

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Forming a partnership and description of trade?

I read with interest regarding partnerships to mitigate tax. I have spoken to my accountant and he says when it comes to the application to set up a partnership tax UTR (unique tax reference) the description of the trade involved has to be specified which he reckons could be an issue because HMRC may argue that my property portfolio is an investment, not a business.

I have a joint property portfolio with a family member and we are looking to transfer a percentage of the property ownership to our spouses and form a partnership. At the moment, we have letting agents to manage the portfolio to enable us to be as hands-off as possible, but I’m sure experienced landlords out there know that even then it’s still a lot of work!

My questions are:
1) How can we form a partnership and get the UTR, given that letting agents manage the portfolio?
2) What are the advantages (and disadvantages) of adding my own Ltd company to the partnership? (From what I’ve read, adding my own Ltd company to manage my properties means I can charge a management fee, but I’m not looking to self-manage as I want to continue to use agents)

Thanks for any help in advance!
Hugh



Comments

Mark Alexander

20:16 PM, 6th April 2017
About 2 years ago

Hi Hugh

It's all about the time you spend managing your business. Say, for example, you own two properties and let them via an agent; it is unlikely that you would qualify as a "business".

Case law (HMRC vs Ramsay) suggests that you would be considered a business if you spend 20 hours or more per week doing what you do. That said, nobody is going to time you so it's all rather subjective. The question to ask yourself is that if you were standing in Court in front of a judge, could you explain why, what you do, is a business?

HMRC's manual PIM1020 says as follows:-

Jointly owned property - partnership

A taxpayer may jointly own properties which are let out as part of a partnership business. This might occur where:

- they are in a trading or professional partnership which also lets some of its land or buildings (but see BIM41015 about the inclusion of rents from the temporary letting of surplus business accommodation in the trading or professional profit),

or

- more rarely, they are in a partnership which runs an investment business which does not amount to a trade and which includes, or consists of, the letting of property.

To read more see https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030

A company is a separate legal entity so there is nothing to stop a company being a partner in your business, regardless of whether it has a trade or not. That said, there are very tight rules to prevent "mixed partnerships" from manipulating tax by hiving off profits into a more tax advantageous tax environment. In simple terms, the company can receive the percentage of partnership profits it owns, plus a commercial rate for the work it does. This differs from the rules affecting partners who are human being in that profits do not have to be allocated in accordance with partnership equity and that drawings do not have to reflect profit allocation or ownership of equity. See goo.gl/HhL9yW

If you would like an expert option on your own circumstances please see https://www.property118.com/optimal-tax-planning/91857/
.

Kate Mellor

20:36 PM, 7th April 2017
About 2 years ago

In addition to Marks excellent information, I have been advised by my accountant that a property partnership cannot be a registered partnership regardless of whether it constitutes a business, which he agrees ours does. I've asked about doing the same and submitting Partnership Accounts rather than individual returns. He tells me that would just be incorrect!

Mark Alexander

21:15 PM, 7th April 2017
About 2 years ago

Reply to the comment left by "Kate Mellor" at "07/04/2017 - 20:36":

Hello Kate

Please ask your accountant to read my comment but more importantly the HMRC manual PIM1030 because he is wrong.

You might also wish to advise him to read the article linked below, in particular the counsel of the barrister and the solicitor

https://www.property118.com/tax-advice-negligence-can-sue-accountant/97147/
.

Hugh Nogan

23:20 PM, 14th April 2017
About 2 years ago

Thanks Mark and Kate for the input. I think my problem is that I'm using and planning to continue to use letting agents - it would be very difficult to convince HMRC that we have a "business". Saying that, having looked at the HMRC's Property Income Manual (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1030), it states:
"Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.
However, where the joint owners are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless:

both entitlement to the income and the property are in unequal shares, and
both spouses, or civil partners, ask their respective tax offices for their share of profits and losses to match the share each holds in the property."

So, if the properties in my portfolio are held as follows:
Me: 40% ownership
My spouse: 10%
Brother: 15%
Brother's spouse: 35%
Then what are the rules for agreeing division of profits and losses? Does the division have to be in those percentages? Or can it be some other percentage as agreed with all owners?

Thanks in advance!
Hugh

Mark Alexander

23:28 PM, 14th April 2017
About 2 years ago

Reply to the comment left by "Hugh Nogan" at "14/04/2017 - 23:20":

Hi Hugh

Is that the real division?

If not, trying to arrive at that position could lead to you crystallising substantial capital gains, hence CGT, and SDLT on the transfers.

If you continue reading Pim1030 and all of the other HMRC Manuals referenced within it then you might find something that could actually work for you. My latest research blog might help you https://www.property118.com/hmrc-special-provisions-relating-partnerships-transfer-interest-property-investment-partnership/97597/

There is an alternative of course, book a Consultation with me.
.

Hugh Nogan

23:43 PM, 14th April 2017
About 2 years ago

Hi Mark

That division can easily be achieved as the properties are currently owned by me and my brother as tenants in common and so for each property we can transfer a specific percentage of our ownership to our spouse tax free. If my undersatnding is correct, then the division of profits and losses can be in a different allocation than ownership?

Hugh

Mark Alexander

23:46 PM, 14th April 2017
About 2 years ago

Reply to the comment left by "Hugh Nogan" at "14/04/2017 - 23:43":

Most chartered accountants fail to realise that and therefore don't advise their clients accordingly.

There is one further part of the puzzle though, the SDLT on the transfers.

I won't spoil it for you.
.


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