Guide To Forming A Property PartnershipMake Text Bigger
It isn’t absolutely necessary to own property jointly to form a partnership.
Also, joint property owners normally declare rental profits on their self-assessment tax returns in proportion to their ownership. This is because HMRC’s default position is to treat rental profits from jointly owned property (joint tenancy) as 50:50 if there are two owners, one third each if there are three owners and 25% each if there are four.
However, partnerships can allocate profits disproportionately to ownership.
This provides an extremely useful tax planning opportunity.
Let’s say, for example, that one of the joint owners is a higher rate tax-payer and another isn’t.
Providing the partners’ agree, the percentage of profits which would ordinarily have been due to the higher rate tax-payer could be allocated to the lower rate tax payer. This works particularly well for couples, whether they are married or not, and especially so where adult children have at least some involvement in the business and could also become partners.
Partners in partnerships are taxed on profit allocation, NOT on drawings.
Furthermore, drawings can be taken disproportionately to profits.
For example, let’s take a partnership consisting of a man, a woman and their two adult children. They don’t have to be married.
The parents might be higher rate tax payers but let’s assume the children are not.
The parents could allocate all of their profits to the children but still draw money from the business, whilst the children leave theirs in the business (save perhaps for drawing enough to pay their share of tax on allocated profits).
This leaves the parents with a deficit in their ‘partnership capital accounts’. In other words, they would owe the business money.
On the flipside, the children would have a positive partnership capital account.
This position can continue indefinitely whilst the partners are alive. However, when the parents die the arrangement must be settled.
The deficit in the parents’ capital account becomes a liability to the estate of the deceased. Accordingly, exposure to IHT is reduced. Bear in mind that the children will already have been taxed on their allocated profits, so there is no additional tax for them to pay. However, once the parents’ debt to the estate is settled, the children can then take the money which has accrued in the business.
It is incredibly straight forward to set up a partnership, but only if you know how of course!
We have created a step-by step guide to forming a partnership, which includes links to the forms you need to complete and submit to HMRC and also examples and a further real life case study of how a family successfully used this tax and succession planning strategy.
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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.