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Joint property rental

I have been instructed by a friend of mine (why are they never easy!) who owns some rental property jointly with his 3 siblings. I was going to complete the usual Land and Property section and tick the jointly let box; however, a couple of issues occurred to me.

  • There is actually 3 properties owned and intention to purchase at least one further property.
  • Their intention is to retain any funds within the (separately set up) bank account to potentially purchase the further property. i.e. intention to make a profit
  • There is a legal partnership agreement written up by a solicitor. It includes a key paragraph stating 'the parties shall be partners in the business of buying residential properties for the the purpose of letting'

I believe therefore that these factors would constitute a business and in fact we should be preparing a partnership tax return. To do this I will need to get a partnership UTR.

I also assume therefore that I ought to be preparing a set of partnership accounts, including a balance sheet showing the cost of properties and mortgage creditor etc?

My final assumption is that the profits should be taxed as Self Employed pages rather than on Land and Property. This therefore means a potential Class 4 NIC liability.

Reviewing HMRC guidance and tax books it seems that for joint property to be a business is rare; however, I still feel that the factors mentioned do create this scenario.

I would appreciate peoples comments on this and also whether there are there any other potential factors/ issues I need to consider?

Regards

Phil

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By blok
16th Apr 2011 09:48

.
I have a very similar case which I took on just last week.
I have three separate business partners who are heavily involved in investment properties. They have other companies set up and are active in building and renting.
They have 12 residential properties let out on a joint basis. There is a partnership agreement and it states that the properties belong to the partnership.
I advised that accounts should be done to 31 may (to correspond with their other businesses) and I am going to tax the profits on a tax year basis. The first accounts will run from 1 June 2010 to 31 may 2011. I will allocate 10 12ths of these profits to tax year 10/11 and for 11/12 I will allocate the remaining 2/12ths plus 10/12 this of the following years accounting profits. Note this is not on a current year basis. I take the view that we can't apply cyb to non trade income and the only reason I am doing it this way is that I suggest we have a balance sheet drawn up to 31 may to make the bookkeeping easier.
I take your point about nic, however the income is not earned from a trade or profession, it is a business but not nicable. The underlying income is still rent.
It's a grey area, you may find that if this was only two partners with only two properties then a partnership doesnt exist. However given the background of my clients I would say that they are professional property investment partnership.

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By pawncob
16th Apr 2011 22:27

just because
Just because HMRC decided to abandon Schedule A and use business principles, it doesn't mean there's been a change in the law.
Letting is NOT a business for tax purposes, whether it's one or a thousand properties.
Income is assessable on a fiscal year basis as per the Taxes Acts.
(When you get entrepreneur's relief on let properties, let me know.)

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By eve2206
16th Apr 2011 22:34

not a partnership?

I thought a partnership was two or more people pooling resources, trading together etc, with a view to making a profit.

Why would you say two people working together in a buy-to-let scheme were not partners?

I'm not saying you're wrong, but I'm a bit confused.

Eve

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By pawncob
16th Apr 2011 22:56

Partners
I'm not saying it isn't a partnership, I'm saying it isn't a business.

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By blok
16th Apr 2011 23:46

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"its not a business".

Dont agree. 

Its not a trade but it is a business.

What has ER to do with anything?  Nobody said it was a trade. Who is talking about CGT?

From HMRC manuals, there are others I could quote.

Jointly owned property - partnership

A taxpayer may jointly own properties which are let out as part of a partnership business. This might occur where:

they are in a partnership which runs an investment business which does not amount to a trade and which includes, or consists of, the letting of property.

A partnership rental business of either type is treated as a separate business from any other rental business carried on by the individual partners on their own account. Each partner’s share of the profits or losses arising from the partnership rental business can't be added to or subtracted from any individual rental business profits or losses. If taxpayers are in more than one partnership, each is dealt with as a separate rental business and the profits of one can't be set against the losses of another.

Partners - investment business

The second type of partnership mentioned in PIM1030 is where the partnership runs an investment business:

which does not amount to a trade, andwhich includes the letting of property or consists entirely of property letting.

For a partnership investment business you always calculate the rental profits for the tax year to 5 April (just like any other rental business).

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18th Apr 2011 15:57

Property Partnership

A property letting business can be a partnership, but why make things complicated? There is no reason why you cannot prepare accounts for the partnership, but simply indicate each partner's profit share on the land & proprety pages of the individual return, thus avoiding the need for partnership returns and the associated penalty risks.

Incidentally, if rents are declared on a partnership return, there is no offset of losses against rents fron non-partnership properties, or vice versa - a potential problem should the partners decide to invest separately in property.

The fact that there is a partnership agreement does not necessarily mean that this is a partnership for tax purposes.

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By blok
18th Apr 2011 17:09

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I agree with you Steve.

My point is that there is a partnership in business to generate income from rental properties.  It is not a trading partnership and should not be taxed as such.  

I was only making the point that I am making up accounts to May and I was advising that the accounts will be split into a tax year basis to satisfy teh rules for investment / rental income.

I think I may have over elaborated what my intention was and by doing so confused the point.

 

 

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