Why You Need To Become A Rental PartnershipMake Text Bigger
HMRC charge tax on the benefit of rental profit and capital growth from rental properties.
There are three primary tax reasons for creating a partnership by splitting beneficial interests rental properties using a Declaration of Trust:-
- To fully utilise more than one nil rate band and basic rate tax allowance
- To utilise more than one personal CGT nil rate allowance on sale
- To form a business partnership which can be incorporated after a minimum of three years without SDLT becoming due (schedule 15 Finance Act 2003)
A Declaration of Trust can be established at any time.
As the legal title at HM Land Registry does not need to be changed when transferring beneficial interests via a declaration of trust there is no requirement to advise or seek consent from mortgage providers. This is because their security remains unchanged. Thousands of Declarations of Trust are arranged by conveyancing solicitors in England and Wales every week.
Forming a partnership with a spouse is often considered most effective as transfers between spouses are exempt from Capital Gains Tax. However, if you’re not married there is nothing to stop you forming a partnership with another party. Examples include; a child, an unmarried ‘partner’, a sibling, a parent, a company you already own or even a friend. If you transfer just 1% of the net value of your property then CGT and Stamp Duty only becomes payable on the 1% transferred.
Once a Declaration of Trust has been implemented all beneficial owners of the property need to complete tax returns. It is also advisable to submit partnership tax returns just in case you ever decide to incorporate you rental property business partnership.
Using Up Basic Rate Tax Allowances
Finance costs restrictions as per The Finance (No. 2) Act 2015 will only result in increased tax becoming payable where the total of ….
- rental profit (as currently calculated for the 2016/17 tax year)
- plus mortgage interest
- plus other taxable income
…. exceeds £43,000 per person a year (due to increase to £50,000 by the year 2020)
Profits and mortgage costs can be managed between spouses by transferring the beneficial interests in property using a Declaration of Trust. The optimal split ensures both spouses utilise their up to their full annual allowance as nil or basic rate tax-payers. Once these are fully utilised it makes sense to form a Limited Company for any future purchases of rental property.
If you are not married and want to consider forming a partnership for tax purposes you need to take advice – please see the form below.
HMRC’s default position for taxation of rental income from jointly owned properties (purchased jointly from day one) is that rental profit is split 50/50. This can be amended to any share (e.g. 99%/1%) subject to a Declaration of Trust and filing a Form 17 with HMRC within 60 days. Note that transfers to anybody other than a spouse could trigger Capital Gains Tax becoming payable.
Where property is owned by one person a Declaration of Trust can also be used to split the beneficial ownership. In that case Form 17 would not be applicable but HMRC would need to be informed of the arrangement and you would each need to complete tax returns for your share of rental profits in future years.
The legal process is relatively straight forward. Declarations of Trust can be prepared specifically for purposes explained above by Cotswold Barristers for £250 + VAT per property. This includes completion of reports for you to send to the Stamp Duty office together with payment as appropriate.