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Property allowance and personal/p'ship prop income

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I have a client who is a partner in a partnership that receives some rental income. The partnership rental profits are shared between the partners on the partnership statements and reported as partnership property income on their respective individual tax returns.

This client also has a small amount of property income from a property owned personally, which is reported on the property pages of his individual tax return.

My question is: Can he claim the £1,000 property allowance against his personal rental income?

 

My view is that although you cannot use the property allowance against the partnership property income, there is no restriction on using the property allowance against the personal income. A colleague believes that because he receives rental income (which has had expenses offset within the partnership) that this taints the availability of the property allowance and it can't be used.

My view relies on the S783BA definition of a relevant property business being in relation to an individual (so the partnership property business is totally distinct and not included) and I interpret  S783BO to only apply to relevant property income (so not the partnership property share) and as no rent has been paid by the partnership to the individual this is irrelevant.

Any insight please? As usual, the HMRC guidance is lacking in examples of anything other than the obvious scenarios.

Thank you

Replies (13)

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By whitevanman
30th Jul 2020 23:50

Have you read PIM4454?

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By Taxchequer
31st Jul 2020 00:28

I have, and I think it’s the gist of one of the legislation sections we read differently.

I read ‘payment by’ as receiving rental income from the partnership (i.e. renting a building to the partnership) rather than receiving a share of partnership rental profits, but I can understand why you’d read it the other way too.

The example in PIM4486 seems to support my reading if you try to interpret what it is trying to show, although I appreciate HMRC examples aren’t often the full picture.

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By Tax Dragon
31st Jul 2020 15:04

FWIW, I agree your interpretation of s783BO.

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By Taxchequer
31st Jul 2020 15:20

Thanks!

It's a shame tax is never set out clearly!

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By whitevanman
31st Jul 2020 16:59

I agree that the example could give that impression. If however you look at the legislation (S783BO) it simply refers to the individual having property income that includes "a payment made by a firm". S783BP is in similar terms referring instead to a close company. It also mirrors (as appropriate) the legislation on the "Trading allowance". I assume the purpose of these sections is to prevent any abuse that could arise but have seen nothing to explain.
As you say, the example is not great but would certainly support your view. However, if you start with PIM4410 there is therein a link to a document "tax free allowance on property and trading income". Go to that document and to the section on "when you cannot use the allowances". That clearly says the allowance cannot be used if you have property income from a partnership (with which you are connected).
It is certainly the case that the legislation is drawn widely enough to have that result and it may be that (as often happens) the example in the PIM is of something perhaps more unusual and misses the obvious.

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By Taxchequer
31st Jul 2020 19:20

I think my interpretation of "a payment made by a firm" would be the partnership paying the individual rent, for example for using personally owned property (so the equivalent of the S783BP provision for companies and effectively removing the potential for every member of a partnership to get £1,000 tax-free by renting the partnership something).

Widely drawn legislation is a pain!

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By whitevanman
31st Jul 2020 22:29

I haven't really spent much time dealing with this sort of thing but I suspect there may be some significance to the fact that some income is "partnership". There are significant differences between property held jointly by 2 or more persons and property that belongs to and is let as a partnership.
In the latter case, the income is calculated at partnership level and each partner allocated an appropriate share thereof (the payment from a partnership?). The implication is that relevant costs have already been deducted in calculating the net income. So, the property allowance would be inappropriate.

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By Tax Dragon
01st Aug 2020 12:53

I still read it as per the OP.

The 'unambiguous' document/comment to which you refer is, to me, ambiguous. I can read it your way, but more easily read it as relevant when part of the rents of your individual property business are paid by the partnership (per the OP).

If you look back to the basic definitions and then reread s783BO (esp (a)), the OP's reading is the natural (and, for me, correct) one.

Plus, if they wanted to exclude partners from (trading and) property allowance(s), the section(s) could just say that.

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By whitevanman
01st Aug 2020 14:28

I agree pretty much all you say and my initial reaction was to share the interpretation. My problem came when I read into it and came to the document in the link I mentioned which did seem fairly clear. Of course, either or both of the HMRC docs could be wrong and examples are not often great, focussing on some, obscure , possible issue and missing altogether the obvious areas of potential doubt.
When I looked into the issue of partnerships (apart from my head hurting) I noted that rental from such is treated somewhat differently in that losses cannot be set against other rental income (and vice versa) and I wondered what possible explanations there might be. I came to the conclusion that it was possibly to do with the legal basis of ownership (interest in undivided share and all that) and as said in my last post, partnership rental profit is calculated at partnership level so deductions have already been given before any payment of shares is made to the partners.
It is one of those where one would like to ask HMRC for a definitive statement of their position (and an explanation) but that is not something one can easily achieve. Failing that, one is left to form a view which is defendable and perhaps make a white-space entry.

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By Tax Dragon
01st Aug 2020 17:48

Some of what you say passes me by, but I wonder whether you are looking too deep. Doesn't s895 (read in tandem with the starting point set out in Ss263,4 and 5) give the distinction you've identified between partnership and individual property businesses?

But if I make my previous point in relation to the HMRC guidance instead of the legislation, it strikes me as easy to say "partners in trading partnerships do not qualify for the trading allowance; similarly if a partnership has property income, the partners do not qualify for the property allowance". Why are they over complicating it and talking about (irrelevant, in your eyes) payments by the firm? As you well know, drawing (profit) from a partnership has zero tax consequence.

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By whitevanman
01st Aug 2020 20:06

Just to confirm, I was with you on this. But, the document on Gov.uk is what caused "my" problem.
Before I read that, I thought the only reason for the various "payment from" restrictions, was to prevent the sort of abuse you have referred to.
I could (should?) have settled for "the guidance is cr4p, ignore it" but I tried to find any possible reason why it might be correct.
That is what led to consideration of the type of issue referred to in my last post.
In that connection I noted the peculiarities around partnerships, with particular regard to property income.
I really don't want to but I will say a little more!
Generally speaking a person can have property income from several different types of source, rents from a property owned 100%, a property jointly owned with others (possibly various groupings) and different "types" (furnished, unfurnished etc). To generalise (overly) all these are lumped together and taxed. The notable exception is "partnership" property income. Not only is it kept separate, losses cannot be set-off sideways. Why is that (apart from the legislation says so)?
I couldn't think of any, obvious reason. So, digging further I read some of the stuff about partnerships and how this differed from a jointly let property. The answer (in again, very general terms) seems to be that partnership rental comes from a property owned by the partnership, that is to say it is a partnership asset. The essential difference seems to be the that the partners are not entitled to the income in a personal capacity (as such), rather they are entitled to a share in the partnership profits. Similarly, they don't own the property but have a share in the entirety of the partnership assets (think tenants in common vs joint tenants).
This may explain the wording of the S783BO exception. The person does not receive rent from the partnership but receives a "payment" from the partnership being his/her share in the partnership profits, part of which falls to be included in his/her computation of rental profits etc.
The stuff in the HMRC BIM82058 and PIM1030 is relevant / interesting.
Ignoring most of what is said above, the only thing that would seem to be particularly relevant is that, where there is a letting by a partnership, net profits are calculated at partnership level. What each partner gets is a share of the net profit. So, they have benefitted from deduction of relevant expenses already. It would therefore be inappropriate to allow them the Property allowance which is an alternative to deducting actual costs. Maybe that is why the Gov.uk doc says what it does and who knows, maybe it is correct!

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By Tax Dragon
02nd Aug 2020 10:08

whitevanman wrote:

But, the document on Gov.uk is what caused "my" problem.
...
I could (should?) have settled for "the guidance is cr4p, ignore it" but I tried to find any possible reason why it might be correct.

One way it might be correct is if it doesn't mean what you think it means.

Does it help to think about the first bullet point? It's the exact same turn of phrase:

HMRC wrote:

You cannot use the allowances in a tax year, if you have any trade or property income from a company you or someone connected to you owns.

That's clearly talking about a payment by the company in relation to your sole trade or individual property business.

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By whitevanman
02nd Aug 2020 16:56

I agree we can read it as if the exception only applies if the payment from the partnership is a payment in respect of rent payable by the partnership to the partner. That fits if we assume the only purpose of / reason for the exclusion, is to to prevent avoidance in a control situation. But, look at bullet 5 referring to rent a room. Why is that exception included? It appears to be due to the claim for expenses. If you consider how the relief works, it applies (for property) if you choose not to claim actual expenses and that must apply to all your rental income. As I said before, rental from a partnership asset is calculated and returned at partnership level and only the net amount is allocated among partners, that is to say, after relevant expenses. So, if you wish to look at it another way, why should a partner be treated more favourably than others?
I don't say that I am right here, simply that I can see an alternative way of looking at it and I can rationalise that alternative. The OP will have to form a view and proceed as appropriate. The only way we will know what HMRC thinks is to ask them. It does not give one great confidence when advising a client, to say, "I'm not sure, but...."
Equally, as has been shown many times, you cannot rely on what someone in HMRC says. You have to get a definitive reply from the technical specialist responsible for that bit of legislation and that is not easy to achieve.

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