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Property rental & partnership tax returns

I recall that a partnership is loosely defined as "two or more people operating together with a common motive to achieve a profit". This can be true of individuals, whether husband and wife or unconnected, renting out property. Thus, should a partnership return be issued in every case where two individuals are letting a property? I seem to have two bands of clients - one that view their property letting as an investment, effectively an alternative pension, and who derive income from employment, sole trades etc. and those who derive substantially all of their income, and devote all of their time, to their lettings activities. Does the way the lettings income is viewed (the latter being more of a "business" activity) determine whether a partnership tax return should be completed or strictly, should a partnership return be completed in all cases. Comments please.
Andrew Lane

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By admin
08th May 2001 15:29

Rental income of an existing trading partnership
If a husband & wife trading partnership also own rental property jointly (in whatever proportions) does that have to go on the partnership return?
What about any joint bank accounts?
Where do the IR draw the line?
If the partnership was more informal, is it more difficult to argue that the other joint income doesn't go on the return? I can see that if there was a formal partnership agreement, that might well specify what assets were partnership assets which would remove any confusion, but what if there is no formal agreement?
Do the Revenue bother in the end as long as the income is all being declared anyway and there can be no loss to them?

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By admin
07th May 2001 14:35

Taxation of income of spouses
You are probably already well aware of this, but there is of course one case where property income in respect of jointly held property is divided between the owners for tax purposes in a different proportion than their interest in the capital:

s282A TA 88 provides that, absent a joint declaration to the contrary, the property income of spouses both holding an interest in property and both being beneficially entitled to income from the property is to be treated as being divided equally between them, irrespective of their actual share in the capital.

I suppose this must sometimes be useful if someone wants to use their spouse's lower rate of taxation without giving them an equal share in the rental property concerned.

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05th May 2001 11:32

Division of rental profit
Question for Phil on this thread:
Can joint owners in rented property, the income from which it is accepted is assessed under schedule A, divide rental income in proportions other than their interests in capital? If you think that this is permitted under Partnership Act, does it require a written partnership agreement, and is the treatment accepted by the Inland Revenue?

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02nd May 2001 14:13

Trade or not?
What you describe as a loose definition of a partnership is actually almost a direct quotation from section 1 of the Partnership Act 1890. The Revenue have been known to say that a partnership only exists if there is a trade. This is a distortion of the law, but what it effectively means is that a partnership return is only required if there is a trade. A trade is a business but a business is not necessarily a trade.
If the letting activities amount to a trade (Schedule D) then Class 2 and 4 NICs are due on the profits (subject to eligibility for deferment) and a partnership return is necessary. You can not decide for yourself if the lettings amount to a trade; it is a question of fact. The taxpayer's other activities and his attitude to the investment are irrelevant. He would have to provide additional services over and above the norm, eg serviced office accommodation or board and lodgings, to be treated as Schedule D. There have been a number of disputes in this area and reported cases include Salisbury House Estate v Fry.
If there is no trade then a partnership return is unnecessary. Instead the individuals have to declare their share of the partnership income and expenditure on their own tax returns, using the income from property pages.

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