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Rental or trading income / CGT or income tax?

Rental or trading income / CGT or income tax?

My client has a large number of properties, all of which were refurbished and are now rented out. 

Some are intended to always be rented out and are held in a 'Property Rental' partnership whilst others, which are intended to be sold at a gain, are held in a 'Property Development' partnership. As such, the expenditure incurred in the property development partnership on legal fees, mortgage interest etc are offset against trading income. 

If the properties in the property development partnership are rented out prior to being sold, is it acceptable to treat this income as trading income and will the eventual gain/loss on the disposal still be a charge to income tax, rather than CGT?

Advice much appreciated, thanks in anticipation. 


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01st Nov 2011 18:20

this is all a bit of a mix up

in the development partnership you are carrying out a trade so all property sales will be subject to IT even if you rent them out from time to time - the rental income is NOT trading income but rental income and slightly different rules apply. the rental income will likely be  taxed with that falling due under the property rental partnership income.

its all a little confusing as we do not have enough details re the make up of the partnerships tho that may not make a lot of difference in the end

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02nd Nov 2011 10:11


Rental income will always be property letting income, not trading income, regardless of the entity - individual, partnership or company - which owns the property.

Judging by the facts given in the question, the partners have clearly indicated that they accept that the sale of the properties held in the "Property Development" partnership will be trading income subject to income tax and that the sale of the properties held in the "Property Rental" partnership will be subject to capital gains tax.  As you have two separate partnerships, the only effective way to change the tax treatment would be to transfer properties at their market value between the two partnerships.

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02nd Nov 2011 15:59

It is not trading income

Carnmores and Euan are correct This can never be trading income. 

The property development partnership will complete a full partnership return with at least a trading page and a property income page. The property page will claim any expenses relating to the rental income properties, for the period of renting,  so it wil be important to record expenses accurately. They will both be completed on an accounts year basis. The two types of income will be allocated between partners in accordance with the partnership agreement.

The profits on sale from these properties will still be part of your trading income.

I would be reluctant to move properties between the partnerships as it could encourage HMRC to challenge the Capital Gains treatment of any sale from the Rental partnership.

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