Mixed Partnerships For Tax Planning PurposesMake Text Bigger
The mixed partnership strategy involves forming a Limited Company to manage your properties and making that company a partner in your business.
This structure is particularly useful for people who manage their own properties and where the viability of full incorporation is questionable.
One of the main reasons for making the management a company partner is so that if you ever decide to incorporate your business at a later date it is easier to do so. This is because it counters any suggestion from HMRC that you wouldn’t qualify for incorporation relief. If the company isn’t a partner HMRC might say that you don’t qualify for incorporation relief because you are not incorporating the ‘whole business’. They might also say you are not a business but rather passive investors on the basis that management is dealt with outside the partnership.
In a mixed partnership for rental property purposes the company partner can charge up to 15% of gross rental income for performing its management activity without falling foul of HMRC’s “Transfer of Income Streams” rules. This would reduce your personal income and hence the tax you might otherwise pay at the higher or additional rates of personal taxation.
The company would pay tax on its profits at the 19% corporation tax rate (scheduled to reduce to 18% next year and 17% the year after). This is far lower than your personal tax rate as higher rate tax-payer. You would also be able to utilise your annual tax-free dividend allowance (currently £2,000 each) to draw money from the company if you need it. Any further profits in the company could be retained for further investment into the business and the company could also be utilised for further rental property acquisitions. Remember that companies are not affected by the restrictions on finance cost relief.
As you would not be transferring the legal ownership of any properties there would be no tax to pay and you wouldn’t be disturbing any of your existing mortgage arrangements.
Mark Smith at Cotswold Barristers can deal with the partnership agreement and all legal documentation relating to incorporation of the company partner and formation of the partnership in accordance with the above for a very reasonable price. However, before you rush to contact him for a quote, we strongly recommend that you complete a tax consultation with Property118 Limited to ensure this is the optimal tax planning strategy for you to consider.Show Book a Tax Planning Consultation
If the mixed partnership strategy is the right one for you then you will want to keep professional fees to an absolute minimum. There are a number of tasks you could deal with yourself in regards to formalising a mixed partnership structure. I have split these tasks into three categories of Compulsory, Strongly Recommended and Recommended.
- complete and file form SA400 with HMRC. This is an application to formally register your partnership. You will need a business trading name.
- To officially appoint individual partners and register that fact with HMRC a form SA401 will need to be completed and filed for each partner.
- To officially appoint the company partner and register that fact with HMRC a form SA402 will need to be completed and filed for each partner.
Whilst the SA401 form mentions paying Class Two National Insurance contributions, payment of National Insurance by landlords is entirely optional. The legislation in this regard can be viewed via THIS LINK.
There is also a very good write-up on the Tax Faculty website of the Institute of Chartered Accountants England & Wales via THIS LINK
- Once you receive confirmation from HMRC that your application to register a partnership with HMRC has been approved you will receive a letter from them with a UTR (Unique Tax Reference) number for the partnership.
- The partnership will need to file an annual SA800 partnership tax return – see THIS LINK.
- As soon as HMRC approve your application and provide a partnership UTR you really ought to open a business bank account in the trading name of the business and ensure that all of the business transactions of the partnership are run through that account, e.g. rent collection, mortgages and insurance payments etc. Santander are offering free business banking at the moment. All business related income and expenses should be transferred to the new business bank account as soon as possible.
- A business website
- Business stationery including letterhead and business cards
- A business email account
- A business telephone number
- Appoint a chartered accountant who is familiar with property partnership accounting.
All of the above are helpful if/when you reach a point whereby incorporation is viable. This is because you will then need to convince HMRC that you are indeed running a business which is entitled to claim incorporation relief, as opposed to curating an investment portfolio which does not qualify for the relief.
One of the reasons for making the management company partner is to remove any suggestion from HMRC that you wouldn’t qualify for incorporation relief on the basis of not incorporating the ‘whole business’ or that you are not a business but rather passive investors on the basis that management is dealt with outside the partnership.
Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).
There will never be an optimal ‘one-size-fits-all’ business structure for tax purposes. The presentation below provides a useful overview of some of the options you might like to discuss with us.