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Property partners

9 July 2018

 

When investment property is owned jointly by two or more people, the arrangement may or may not amount to a partnership.  Whether a partnership exists or not may matter for a number of reasons: tax is one of them.

Of course, joint and several liability for partnership tax hasn’t been around for a long time now, so that’s not an issue.  Or, to be more accurate, joint and several liability for UK income tax or corporation tax on profits hasn’t been around for a long time: if you have property in other jurisdictions, take note that the rules may be different.  And, even in the UK, joint and several liability remains for other liabilities of a partnership, including in particular for Stamp Duty Land Tax (“SDLT”) and its Scottish and (from 1 April 2018) Welsh equivalents.

For tax purposes, income from each UK letting property that you own yourself, together with income from your share in any such property that you own jointly other than in partnership, forms a single business with a pooling of income, expenses, allowances and losses.  But remember that that single deemed business does not encompass anything you do in partnership.  Each partnership carries on a business separate from any letting business that might be carried on by the partners independently.  In particular, it’s not possible to set losses of a partnership business against income of a “sole trade” business of one of the partners or vice versa.

A further disadvantage of partnership is the requirement to file a partnership return, with all the opportunities that that gives for incurring penalties for failing to do so on time, at all, or correctly.

So, what are the advantages of holding property through a partnership rather than simply holding it jointly?  Precious few, actually.

One is in regard to flexibility of profit-sharing.  In most cases unconnected people can agree to share income from jointly-held property in whatever way they see fit, and will be assessed to tax on that basis (though in some cases it may be necessary to have regard to the “settlement” rules).  But in the case of a husband and wife (or civil partners) income from property held jointly other than in partnership is treated as arising in equal shares unless the property is held (both as to capital and income) in unequal shares and the parties both elect that income is to be assessed in those shares.  By contrast, the ability of partners in a partnership to split income in whatever way they choose, and even to split entitlement to capital and income profits in different proportions if that’s what they decide, is unfettered and applies as much to spouses and civil partners as to anyone else.

Another may be in regard to SDLT on transfer of property to a company.  Partnerships have their very own set of SDLT rules.  They are far from simple, but one result is that when a partnership between husband and wife or civil partners (or any other partnership where all the partners are “connected” other than by being in partnership) sells land to a company controlled by the partners (or by any combination of them), SDLT is very often not payable.  Inevitably, though, there are anti-avoidance rules to discourage over-enthusiastic exploitation of the statutory provisions: don’t try it at home without seeking specialist advice.

And don’t run away with the idea that whether you hold property in partnership or not is a matter of choice.  No: it’s a matter of fact.

HMRC take the view that mere joint ownership of property by a group of people who jointly let it out is unlikely to amount to partnership: partnership requires something more.  A partnership may exist where in conjunction with the letting the tenant is provided with “significant additional services in return for payment”.  And where a trading partnership also owns investment property, partnership treatment will normally apply to the rental income.  As HMRC put it, “much depends on the amount of business activity involved. The existence of a partnership depends on a degree of organisation similar to that required in an ordinary commercial business.”

A sidelight on joint property ownership is cast by TCGA 1992 s162.  This is the provision that allows deferral of CGT where a “business” is transferred to a company in exchange for the issue of shares. HMRC concede that “business” is a wider term than trade and that s162 can in principle apply where a letting business is transferred to a company.  If the property is jointly-owned by the transferors but has not historically been treated as a partnership, the chances of persuading HMRC that s162 relief is available are slim.  Indeed, even where a property investment activity has been taxed as a partnership or even carried on by an LLP, HMRC have been known to seek to resist giving s162 relief, on the preposterous grounds that the thing that they have happily been taxing as a business for many years is not..er.. a “business”.

The position is different (as it so often is) for VAT.  For those purposes, joint owners of land who jointly exploit the land (for example by letting it) in circumstances that VAT liability arises are required to be jointly registered for VAT.  The only forms of joint registration possible under the VAT legislation are as a partnership under s45 or as an unincorporated association under s46.  HMRC’s legal advice is that for co-owners the more appropriate (or perhaps less inappropriate) option is to register under s45, so that is what is required.

For more on partnership or jointly-owned property, please get in touch with your usual BKL contact or use our enquiry form.