Joint property but not joint lettings

Joint property but not joint lettings

Didn't find your answer?

Hi all- new client husband and wife are buying a property to let. In joint names. 50:50 ownership.  Agreed that this property is a bargain and in an area likely to have high value increase, with potential for Capital Gain when sold.

Husband is a 40% taxpayer- wife has small part time job with about £2000 unused personal allowance.

Solicitor has advised that whilst the property can be owned 50:50 he's "able to make all rents applicable to wife".

PIM 1030 is very clear- clients don't want to understand- reasonable I'd say after solicitor's words. Form 17 not even printed off for them.

Seems solicitor is trying to "sell" a partnership agreement- accepted that wife will attend to all letting matters herself as husband works away for long periods.

So- anyone had experience of this or any other legal workround re PIM1030 joint lettings?  And will it work?  Dammit- that's two questions.

Thanks in advance.

Replies (20)

Please login or register to join the discussion.

avatar
By tonycourt
11th Dec 2015 14:52

the solicitor is correct
HMRC accept the attribution of rental income for married couples in different proportions to ownership or the default 50/50 where a genuine partnership exists.

Read the penultimate section of PIM1030 headed "Jointly owned property - husband & wife or civil partners". That confirms that the usual allocation of rental income doesn't apply to a partnership arrangement.

Thanks (0)
Portia profile image
By Portia Nina Levin
11th Dec 2015 15:07

If husband and wife partners each have a 50:50 share of the capital then you need to consider both the application of the settlements legislation (has a right only to income been settled on the wife), as well as ITA 2007, Part 13, Chapter 5AA.

The PIM1030 commentary precedes Chapters 5A and 5AA and just ignores the settlement legislation.

I would not be wanting to rely on PIM1030 for transactions of any substance.

Thanks (0)
avatar
By tonycourt
11th Dec 2015 15:26

settlements legislation
I don't think the settlements legislation would cause trouble here. Partnership property under the the 1890 Act is jointly owned with each partner having a right to all the income. Thus the allocation of income between partners doesn't constitute a gift between them.

While the comment in PIM1030 appears lightweight there's a lot behind it, i.e. partnership law.

I was an expert witness in an unreported case involving partnership ownership of a property and the right to income under partnership law. The appellate court implicitly agreed with the view expressed in PIM1030. In the absence of overriding tax legislation the right to income as decided by the partners is also their respective taxable income.

Thanks (0)
By Tim Vane
11th Dec 2015 15:41

Expect HMRC to look very closely indeed at any partnership arrangement and assume a high probability that they will attack it as not being a real partnership. But ultimately if those are the clients' wishes then you'll have to go ahead with it. You should get additional fees for the partnership returns and you should advise the client to take out fee protection insurance for when the inevitable happens.

Thanks (0)
Portia profile image
By Portia Nina Levin
11th Dec 2015 15:45

Things do differ in husband and wife land. The starting place being that the purported partnership is just a sham.

I do not dispute that, generally speaking, partners in a partnership are free to agree to share profits in whatever proportions they agree.

However, where one partner agrees to less than their fair share of the profits in favour of another partner receiving more than their fair share of those profits (which PA 1890 says, by default, that they are "entitled to share equally"), with nothing being received in return, there is de facto a settlement, but that only matters where the partners are husband and wife, which is a point that PIM1030 does not consider.

And what is most certainly not behind PIM1030 is Chapter 5AA.

I am sorry, but it is just poor advice to not identify for a client the routes that HMRC might use to attack.

Thanks (0)
avatar
By tonycourt
11th Dec 2015 16:05

Two things

First, the practicalities of proving a partnership exists and what HMRC think about it's validity is an important issue to which clients ought to be alerted - that's certainly what I would do, but that's a question of perception it is not a question of whether something is right or wrong in law.

Having availed your client of the information they may decide that discretion is the better part of valour and so drop the idea of a partnership - but that does not mean that it isn't a valid option.

Plus given the level of understanding of technical issues by those within HMRC that handle day-to-day work, in my view (and I know others will have different views), if you point them towards PIM1030 they are likely to say "Oh! I see, that's fine because computer says yes". In short you will arrive at what I believe to be the right answer even if it's for the wrong  reasons. No harm no foul.

Second,the settlements legislation doesn't come into play. Without restating the whole Arctic Systems case; a key point was/is that for there to be a settlement there must be a gift i.e.a transfer of something with an element of bounty. There is no bounty in allocating a share or varying shares of partnership income to a partner because every partner has a right to all the income. You can't make a gift to someone of something they already have a right to. 

Thanks (0)
Portia profile image
By Portia Nina Levin
11th Dec 2015 16:23

Tony. Please can you point me to where in PA 1890 it says that every partner is entitled to all of the income? Because I know (and it is also obvious) that there is bounty where one partner gives up part of their fair share of the profits in favour of another.

People who provide professional advice, and are exposed to the risk of professional negligence claims, rather than just providing ham tax tips, without assuming any liability, must properly cover all the bases.

These non-technical staff who handle the day-to-day work, and do not relally have a clue, might just happen upon BIM82065 and TSEM4215.

Thanks (0)
avatar
By tonycourt
11th Dec 2015 16:42

Section 24  - share equally, means equally in the whole - not my definition but that of an appeal court Master. I happen to agree. 

Remember we aren't talking about giving away a share of a partnership assets,for which there would obviously be an element of bounty, we are only concerned with the income. However, of course, if one spouse gave a share of the partnership to the other the settlement legislation would still not bite because it would not be a gift wholly or mainly of income.   

Thanks (0)
Portia profile image
By Portia Nina Levin
11th Dec 2015 17:04

So if hubbie agrees to receive less than his equal share of the whole with the effect that wifee receives more than her equal share of the whole, no bounty is conferred on wifee and the bounty not so conferred is not a right wholly to income?

Thanks (0)
avatar
By tonycourt
11th Dec 2015 17:28

Precisely so. But I detect an element of sarcasm in your response - if I'm wrong forgive me and so I'll elaborate a little further

The "bounty" test only has to be applied where there is a gift. If there's no gift you don't have to worry about whether there is bounty.

For example, If the partners of a three person general partnership decided that one year the profits ought to be divided 20/20/60 and the next year 30/30/40, has one partner made a gift to the others - I would say not. With a married couple partnership it's no different and HMRC realise this not just in relation to property income partnerships, but all such partnerships see BIM72065.

While HMRC have archived BIM72065 the law behind it has not I believe been superseded. I think they just don't like being so open these days 

Thanks (0)
Portia profile image
By Portia Nina Levin
11th Dec 2015 17:55

BIM72065 is now BIM82065. And it says:

"Settlements legislation

However, even if it is considered that challenging the existence of a partnership would not be successful, it does not necessarily mean that this is the end of the matter. In certain circumstances the settlements legislation may apply - see TSEM4215."

TSEM4215 then says:

"The creation of a partnership may be regarded as an arrangement for transferring income from a settlor to members of his or her immediate family - see BIM82065.

Where the incoming partner receives a share of profits out of all proportion to the contribution made to the partnership, the arrangement would include an element of bounty."

The bounty test is the starting point to determine if there is a settlement (aka a gift). Not the other way around.

Thanks (0)
avatar
By Duncan Cameron
11th Dec 2015 18:00

T in C

Bounty is only relevant if there is a partnership. As Portia says, the PIM stance has been superseded by Chapter 5AA.

Partnership is more than mere joint ownership. HMRC are very unlikely to accept that a couple owning one let property are in partnership. A single investment property is not a business and without a business you can’t have a partnership.

Anyway, is there not an easier way to achieve the desired result, viz hold the property as tenants in common in unequal shares in a ratio that is efficient for income tax and then for the wife to make a gift to better half shortly before sale if a different ratio is required for CGT?

Thanks (0)
Replying to atleastisoundknowledgable...:
avatar
By tonycourt
12th Dec 2015 00:48

I don't think so in this case Duncan

I don't believe chapter 5AA applies in this instance for two reasons: it doesn't apply to husband and wife partnerships and there has been no disposal of an income stream.

Thanks (0)
avatar
By cohen
11th Dec 2015 18:02

Hi

Why don't they just own it in unequal shares, or do a declaration of trust to set out beneficial ownership giving the wife the majority interest ?

 

Thanks (0)
avatar
By tonycourt
12th Dec 2015 00:45

Three things

First; Gift = bounty and bounty = gift, naturally. I understand that, but if you prefer the latter order there still has to be bounty there can't be bounty if there is nothing to give. A partner has a right to share in all the income so you can't give them any more than that.

As you know there an important difference between an undivided share (tenants in common) and a share of the whole (joint beneficial ownership). Partnership assets, and thus the income derived from them fall into the latter category unless overridden by agreement.   

I therefore repeat my earlier example and ask the same question; is a change in partnership profit sharing from one year to the next in a general partnership (of unconnected persons) a gift between partners? Not in my opinion.

Second; if, but, maybe.......HMRC are not saying that creation of a partnership is an arrangement just that it may be one. In other words treat it with suspicion. That's not the same thing as saying it definitely is a settlement.  

Third; referring back to the OP's statement you'll see that we are dealing with a joint purchase and not the transfer of an existing share of an asset. If you want to debate how the purchase of the wife's share is funded and whether that has a bearing, I think we'll be here till doomsday and not get to a wholly satisfactory conclusion. 

  

 

Thanks (0)
Jennifer Adams
By Jennifer Adams
13th Dec 2015 20:53

May I direct you to this article...

'We're in this together' - particularly the 'Tax Tip' bit

https://www.taxinsider.co.uk/1024-Were_In_This_Together_Part_3_Shared_Ow...

HMRC will not accept that a letting of one property is a partnership - to be a partnership you need to look at s1 Partnership Act 1890.

The difference between joint investors and a trading partnership is that for a partnership to exist there needs to be a degree of organisation similar to that required for an ordinary commercial business with a view to making a profit.As Duncan says.

This situation is not a partnership. We are looking at joint owners here. If they were not married then they can choose the split. But they are. So you need to make the ownership tenants in common 99:1 in favour of the lower earner (or in whatever percentage split is best) and then submit form 17.

Everyone goes on about form 17 but it is, in fact, only a confirmation that the underlying ownership percentage is to be used in the tax calculation.

You then go to a solicitor to make wills giving each part to the other in case of divorce.

Thanks (0)
avatar
By tonycourt
13th Dec 2015 22:05

There can be a property partnership

@ Jenny Adams

Thanks, it's always useful to have input from an experienced and knowledgeable source.

However, we don't know enough to say whether or not the rental business can count as a partnership, but as you say it is likely HMRC would argue that it would not. However, that is for the OP and client to argue. I have my own views, but they aren't relevant because the question is not whether or not there is a partnership, but rather:

if there is a partnership can it share profits how it likes, and  if it does,who is taxable on them.

Lee's article is a good one, his always are, but he does not say anywhere that in his view there cannot be a partnership.

An article on Mark McLaughlin's website, presumably approved and edited by him, addresses exactly this issue and says pretty much what is said in this accountingweb post ( see link below thought the final post was jolly good by the way :-)

http://www.accountingweb.co.uk/anyanswers/question/property-rental-partnership-0

The whole point about a partnership (where one does exist) is that ownership of partnership assets is not as tenants in common - it is in effect equivalent to joint beneficial ownership. Thus an automatic accruer applies to the partnership assets - that is to say ownership of assets and income not taken by one partner automatically falls to the remaining partner(s).

While the relatively new chapter 5AA is anti-avoidance aimed at partnership profit sharing it only applies where there is a disposal of an income stream and there is avoidance involved, but most importantly for this case it cannot apply because husband and wife partnerships are specifically excluded. 

The bottom line Q & A as I see it is therefore:

Can a property partnership exist?  - Unequivocally yes.Can spouses for a partnership? - YesCan husband and wife share profits how they wish?  Yes, of course, it's a partnershipWill the members be taxed on there respective partnership shares? - Yes, why not.Was the solicitor who suggested the wrong? - No, however.....Is it good advice? That's subjective - if it I were advising friends I would probably say  "it's a good idea in theory - but in practice it's a different matter, so I wouldn't".

 

 

Thanks (0)
Portia profile image
By Portia Nina Levin
14th Dec 2015 11:13

I think your recollection may be a little hazy Tony.

http://www.propertylawuk.net/constructivetrustpartnership.html

I assume that you are the Mr Antony Court referred to in the Bathurst v Scarborow judgement, where the parties had declared that the property in question should be held outside the partnership as joint tenants, rather than as partnership property (whereby they would then be tenants in common).

Thanks (0)
avatar
By CrowtherP
14th Dec 2015 13:53

The theory's great but

The theory is all well and fine; but 5 years down the line I would not like to try and ward off any HMRC interest in this arrangement.   Neither would I like to try and explain to the husband how much the penalty and interest might be, if the partnership arrangement does not stand up to scrutiny.

1. It looks and sounds like Jointly-held property under section 836 and 837, it smells like it too, from here.   I do not really see what is wrong with a 90-10 or 99-1 split thus giving the Husband a share of the eventual Capital Gain.

2. Unless the partnership had some trademark evidence of its' existence [The partnership will have to file annually, it would maybe have some annual accounts. It might need to have some online presence, as landlord to the occupying tenants etc.?] the tax should [IMHO] be split equally subject to a Form 17.

3. Any debt loan documents tied up with the land purchase might be prejudicial.

4.  I can see where there are more than four owners of the land and [maybe] an employee who actually runs the letting trade, that this type of situation might amount to a proper land partnership; but HMRC [with greater database details of UK Landlords in the HMRC new digital "account" surely Just around the Corner?] might look at this, either sooner or later?

 

 

Thanks (0)
avatar
By WallyGandy
19th Dec 2015 09:46

Thanks to you all

 

May thanks to all contributors to this debate.  You've clarified my thoughts that this is not 100% safe.

Next job is to create "no entry" signs around their next path of action- let the solicitors continue to advise.

Clients have heard words they like- next stages up to them but I feel obliged to write confirming my reservations as HMRC have an arsenal of ammunition to try to shoot them down in flames.

Finally, I should have emphasised the PIM I referred to was from the solicitor's meeting and was referred to by the client.

Many thanks again- my own thoughts were brought in my many contributors and I feel happier as a result.

Merry Christmas to you all

 

Thanks (0)