Is a Property Partnership future proofing my business?

by Readers Question

10:48 AM, 21st September 2017
About A year ago

Is a Property Partnership future proofing my business?

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Is a Property Partnership future proofing my business?

My partner and I have a portfolio of 10 properties in joint names which we fully self-manage including lettings and repairs. They are singe let houses, not HMO’s. We treat this as a business as it is our main source of income. I’ve read quite a lot about the potential advantages of being a property partnership, particularly for future incorporation (SDLT relief).

We acquired our jointly owned properties as tenants in common with prescribed shares and our overall tax position regarding S24 is pretty good. We won’t get hit until year 4 and although annoyingly unfair it’s not likely to be a major problem. Our current strategy is that any future acquisitions will be through a limited company which we have up and running otherwise we would be hit further by S24 tax.

We have in effect been operating as a partnership with our 10 properties and certainly hit the 20hr time committed to the business threshold (Ramsay case). We also created a formal partnership agreement last year. I intend to submit a partnership return alongside our individual tax returns to register us as a partnership with HMRC. The aim being to potentially incorporate in the future. I don’t really need to incorporate now and we take income from profits but may want to in a few years time. The full implications of S24 will be in place and having all our properties within a company structure may well be preferable.

To register as a partnership with HMRC my understanding is that we will have to obtain a partnership UTR and submit

– Partnership Tax Return form SA800
– Partnership Trading and Professional Income form SA800TP
– Partnership UK Property form SA810

Is anyone else taking this approach and have any useful insights and advice.

Any advice on a couple of things I am also uncertain of are welcome.

1. Whether we are considered a Trade/Profession Partnership or Investment Partnership. I am assuming that as a Partnership we are running a business or profession in letting and managing rental property as opposed to an Investment partnership which sounds a lot more of a passive activity.
2. Does registering as a partnership have any impact on our individual tax status, for example, I have carried forward losses to offset against rental income (net profit) which I would of course like to continue to use.

Thanks

Adrian



Comments

Mark Alexander

10:58 AM, 21st September 2017
About A year ago

Hi Adrian

The ICAEW has a very useful article which should help you to decide whether you carry on a trade, profession or purely a property rental business - see https://ion.icaew.com/taxfaculty/b/weblog/posts/propertylettingandnationalinsurance

With regards to your other questions; if two or more people engage in a business they are already a partnership by definition of the Partnership Act 1890. You do not need to do anything else, and if you do, without proper advice, you could be creating problems for yourself. See HMRC Internal Manual SDLTM33110 - snippet below with my highlight.

If you switch from being joint owners to being a partnership with it's own UTR, and have previously accounted for rental profits and losses as individuals, then you will not be able to offset accumulated personal rental losses against the partnership profits of the newly registered partnership. See HMRC Internal Manual PIM1030 - highlighted snippet below.

It seems to me that you're trying to avoid paying for professional advice, and might well be getting yourself into a complete mess as a result.

Please book a consultation via our main tax page - link >>> https://www.property118.com/tax/

Daren Peacock

16:38 PM, 21st September 2017
About A year ago

So if they are already a partnership there shouldn’t be a problem with the carried forward losses provided they’ve arisen whilst operating in partnership . It would just be a matter of convincing HMRC that they should have technically been reported via a partnership tax return. They would not be ‘switching’ from joint ownership by formalising the partnership so I think Mark’s response is misleading.

Mark Alexander

18:12 PM, 21st September 2017
About A year ago

Reply to the comment left by Daren Peacock at 21/09/2017 - 16:38
Have you read PIM1030?

Adrian Alderton

21:23 PM, 21st September 2017
About A year ago

Many thanks for taking the time to reply. yes I had a look at PIM1030 and had thought it indicated no change in my individual tax status. Statements such as 'the property income rules will not alter a taxpayers status. I am not however an accountant and may misinterpret the technical detail.
My thinking is that in effect we have been operating as a partnership business just not registered with HMRC as a partnership so would be formalising what in effect is already happening.
Over the years I've found it quite straightforward to submit self-assessment returns so just kept doing that and only appointed an accountant last year when setting up a property company. I have raised this issue with him however he does not think that I will receive any tax benefits as rental profits/losses will be calculated on the same basis. Also there are practical issues such as future refinancing and increased accountancy fees. He felt that a property owning partnership is not automatically a business and we were an investment activity involving property rather than a trading partnership.
He didnt see any real upside although in my view there are potentially longer-term benefits with more options and potential financial gains re any future incorporation.
Hence my further research and enquiries.

Mark Alexander

9:30 AM, 22nd September 2017
About A year ago

Reply to the comment left by Adrian Alderton at 21/09/2017 - 21:23
Hi Adrian

I do follow your logic, and to a lesser extent that of your accountant.

There is nothing in legislation I'm aware of which compels a property rental business partnership to obtain a partnership UTR. However, it is the fact you have done so which concerns me because it provides HMRC with an argument that something must have changed at the point you did so.

HMRC might ask why you didn't previously submit SA800 partnership returns. What would your answer be to that question?

Would your accountant say "well I didn't consider them to be a business at that point"? If he does, HMRC might well say something along the lines of "OK, so why has that changed?"

We are into a very grey area here because if it is accepted that you are operating your property rental portfolio as a BUSINESS, the fact that there is more than one of you means that you are a partnership by virtue of the 1890 act. Therefore, why did you decide to register the partnership and why didn't your accountant do so before?

If your accountant successfully argues that you were not a business until you registered the partnership, then you have the problem of not being able to offset partnership profits against your personal accumulated rental losses.

Mark Alexander

10:26 AM, 22nd September 2017
About A year ago

Reply to the comment left by Adrian Alderton at 21/09/2017 - 21:23
One further thought Adrian; when you submitted your SA400 to register the partnership with HMRC, what date did you say the partnership was formed?

That is where most people in your position (i.e. accumulated personal rental losses) shoot themselves in the foot.

Puzzler

7:50 AM, 23rd September 2017
About A year ago

I had accountancy advice that as of a recent case earlier this year (can't cite I am afraid) a partnership is a business and carries the same benefits as a limited comany and there is in fact now no real need to incorporate.

Mark Alexander

8:59 AM, 23rd September 2017
About A year ago

Reply to the comment left by Puzzler at 23/09/2017 - 07:50

Hi Puzzler. Well that's a new one! Please re-visit that advice and share the details of the case here.

I have heard it muted by some accountants that mixed partnerships and LLP's might avoid restrictions on finance cost relief but I have yet to be convinced of that too. The

Adrian Alderton

14:16 PM, 27th September 2017
About A year ago

Your comments are much appreciated. Just for clarification I haven't yet requested a Partnership UTR from HMRC or submitted a partnership return at this stage. I had just researched the partnership route and checked out the process whereby a UTR appeared to be the first step.
As you say HMRC could well ask what's change and I could only advise that our portfolio had grown over the years to be an established business by 2016 which is correct. That might be better than simply saying i didn't know about the partnership rules !

Mark Alexander

15:55 PM, 27th September 2017
About A year ago

Agreed, you could do that but you would be waving goodbye to your ability to offset future partnership profits against personal rental losses.

I suggest you utilise your personal rental losses BEFORE registering the partnership.


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