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Mixed partnership can be tax efficient for landlords who already pay higher rate tax, or will be pushed into higher rate tax brackets so as a result of the Section 24 restrictions on finance cost relief.
Consider a mixed partnership if:-
The mixed partnership strategy involves forming a Limited Company to manage your properties and making that company a partner in your business.
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. For example, let’s suppose your rental income is £150,000 a year. The managing partner company could charge up to £22,500 for managing the property portfolio and pay just 19% corporation tax rate (scheduled to reduce to 18% next year and 17% the year after) on its retained profits. Without appointing a managing partner company a higher rate tax-payer would pay 40% tax on the retained profits, an additioanl rate tax payer would pay 45% and if your taxable income is greater than £100,000 you would pay an effective 60% tax rate as a result of losing £1 of your nil rate band tax allowance for every £2 of taxable earnings over £100,000 a year.
It is also important to consider whether the charges imposed by the management company might result in taking you out of the higher rate tax band completely. If it does, then you will no longer be impacted by the Section 24 restrictions on finance cost relief. For a person with taxable income of £100,000 to £122,000 the tax savings are very considerable indeed.
Profits retained in the company can be used for further investment into rental property acquisitions or simply retained as cash for your retirement or when your income falls below the higher rate tax threshold. Remember that companies are not affected by the restrictions on finance cost relief. Also remember that dividends paid to lower rate tax-payers are taxed at just 7.5%, so it may make sense to defer dividends for a period when your income falls into the lower rate tax band.
The partnership could be structured on the basis of creating joint ownership with the company by transferring just a very small percentage of the beneficial ownership of your properties to the company, to the extent where there would be minimal if any CGT or Stamp Duty to pay at all. Also, you wouldn’t be disturbing any of your existing mortgage arrangements so the only need to consider refinancing would be for better rates or if you need to raise further funding. Otherwise, your existing mortgage arrangements could remain in place.
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.
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 Form To Book A Tax Planning Consultation
The mixed partnership strategy can also be used in conjunction with appointing family members as partners in the business. So as not to over-complicate this article, if you want to consider appointing your spouse, your children, other family members or key members of your team I have linked a case study HERE.
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.
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