I think our accountant may have messed up

by Readers Question

8:25 AM, 6th March 2017
About 2 years ago

I think our accountant may have messed up

Make Text Bigger
I think our accountant may have messed up

I have been reading your Landlord Tax Tutorials with great interest since the beginning of this year. The penny dropped for me in one of the latest articles and I think my accountants negligence has resulted in my husband and I paying £5,000 a year more in tax than we needed to. I would be most grateful if you would let me know whether I have understood this correctly. I think our accountant may have messed up

The background is that we had twins just over three years ago. I pay the additional rate of tax at 45% whereas my husband has been the stay-at-home parent. This made financial sense as I was by far the higher earner.

Our rental properties are owned jointly and produce £40,000 a year of rental profits.

My husband has no other source of income.

Our accountants have been submitting self-assessment returns on the basis that we share these profits equally, i.e. £20,000 each.

This resulted in my husband paying £1,800 of tax on his share of the rental income this year, after taking into account his personal allowances.

On the other hand, I paid £9,000 of tax on my £20,000 share of rental profits due to the 45% tax rate.

On reading your tax tutorials it occurred to me that our accountants should have advised us to form a partnership and to allocate 100% of the profit to my husband. He would have paid tax on the other £20,000 at the 20% tax rate, i.e. £4,000. This is £5,000 less than I paid.

Do you agree with my numbers?

I have sent an email to my accountant this weekend and await his response. Meanwhile I am contemplating what to do about this.

Any further thoughts please?

Thank you.

Penny



Comments

Martin Wardle

23:20 PM, 8th March 2017
About 2 years ago

Reply to the comment left by "Mark Alexander" at "08/03/2017 - 11:56":

I know the case Mark. I have clients that have clearance on the same grounds. The case does not answer the partnership question however. It asks if the activity was sufficient to qualify as a property business. They are not the same even though often confused in common language use.

Mark Alexander

7:00 AM, 9th March 2017
About 2 years ago

Reply to the comment left by "Martin Wardle" at "08/03/2017 - 23:20":

Yes I agree.

What the case also doesn't tell us is whether working 19 hours a week and owning 9 properties would be deemed to be a business.

I have seen a section 162 advance clearance for a portfolio of 6 HMO's but similarly, I've known HMRC inspectors to respond to clearance requests for much larger property portfolio's along the lines of, "here's a link to the legislation, please follow that". Very unhelpful indeed! Perhaps some inspectors are becoming overwhelmed with them?

Your point regarding partnerships is unclear, perhaps you will expand so that I may comment further?
.

Martin Wardle

7:38 AM, 9th March 2017
About 2 years ago

Reply to the comment left by "Mark Alexander" at "09/03/2017 - 07:00":

Ramsay looked at whether there is a property business. It does not and did not need to review whether there was a partnership as that is not in question when holding over CGT on properties.

Having a partnership depends more on what you do above and beyond the letting of properties. PIM1030 tells us that to have a partnership you need to provide significant additional services in return for payment. Very few landlords do this...

Mark Alexander

7:59 AM, 9th March 2017
About 2 years ago

Reply to the comment left by "Martin Wardle" at "09/03/2017 - 07:38":

Are you aware of any Tax Tribunal cases (at any level) concerning PIM1030 for landlords?

If in doubt seek advance clearance is my advice.

Interesting thread on Money Saving Expert on this by the way >>> http://forums.moneysavingexpert.com/showthread.php?t=5005492
.

Martin Wardle

20:01 PM, 9th March 2017
About 2 years ago

Nope but there has never been a time when so many people started trying to be partnership either.

The link on allocated shares is again. It connected to the point of whether there is a partnership. It is well established that non married / non civil partner joint owners can allocate profits different to ownership but it does not apply to married couples.

Rather than keep sounding like a broken record I'll drop out here as I'm not sure any progress is made on the two opening points. That is you cannot simply pay any costs and hope for a deduction and that joint investment is very rarely a partnership.

Time will tell as and when HMRC start enquiringly into SDLT returns on the partnership point and meanwhile advisers need to ensure their PI is up to date.

Also don't forget that all of the main institutes issued guidelines to members recently stating that they should not go against HMRC stated beliefs without risking their memberships... a sure sign that they (HMRC and the professional bodies) have had enough of artificial arrangements.

Mark Alexander

20:06 PM, 9th March 2017
About 2 years ago

Reply to the comment left by "Martin Wardle" at "09/03/2017 - 20:01":

Noted, thank you for your contributions ?
.

Neil Robb

19:18 PM, 12th March 2017
About 2 years ago

If the properties are held in joint tenants in common then it is 50 /50 unless you draw up a beneficial interest say %5 /95%. Are you willing to hand over 95% of the properties to your husband. The other thing is you may have to advise mortgage company but I am not sure
I would say did you ever ask the accountant is there a better way to reduce tax bill.
At the end of the day you have to communicate with your accountant. I go back to mine regularly and say can we do this or that. He gives me straight answers I might not want to hear.

Mark Alexander

19:44 PM, 12th March 2017
About 2 years ago

Reply to the comment left by "Neil Robb" at "12/03/2017 - 19:18":

Hi Neil

Be careful, you're straying into advice here.

If joint owners are a partnership they can allocate profits in any proportion regardless of how legal title and beneficial interest is split. There is an exception however for mixed partnerships which include a limited company.

Even though two people trading together is technically a partnership under the 1890 partnership act, HMRC will not allow the above unless the partnership has its own Unique Tax Reference number.
.

1 2

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Nottingham lose £95k appeal against landlord

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More