I own jointly-held property – is this a tax partnership (and does it matter)?
First Published: March 2015 | Available in: Property Articles Your Property NetworkMany property investors own property in joint names with other investors, or a spouse, or a family member, or a friend. But is this a tax partnership, and if it is, does it matter
This article looks at property rental partnerships – what are they, what are the implications if you have one, and what should you do about it.
I own jointly-held property with another person – is that a ‘partnership’? And, does it matter?
Property owned jointly with another person, may or may not be treated as a partnership. Joint ownership of property does not, in itself, mean there is a partnership.
Simple joint ownership of property is the most common form of joint ownership (whether ‘tenants in common’ or as ‘joint tenants’ – see later), and the large majority of landlords don’t run a ‘partnership’ – instead, they have a number of properties that are owned jointly, even if in varying degrees, with other persons. However, note that joint owners are BOTH responsible for declaring their own share of a property rental business to HMRC – this can’t be delegated away to anyone else!
One key point to note is that a profit or loss arising from jointly-owned property can be split in any proportion that the owners decide – subject to this being properly-declared via a deed of trust – but, this agreement (documented via a ‘deed of trust’, MUST be made at the time of the change split from 50-50).
Finally, married couples & civil partners are required to notify HMRC in writing within 60 days of having made a change to the interest any jointly-held property (whereas unmarried people are not required to do so).
So what is a tax ‘partnership’ exactly?
An actual tax ‘partnership’ arises where there are substantial property-related activities performed by each person, and usually several persons, and this goes far beyond a simple joint ownership of several properties.
In reality, the large majority of property investors who rent residential property on a joint basis fall well-short of this definition. Most landlords simply provide a rental property, and not a Bed-and-Breakfast service, or hotel, or student-‘all-in’ accommodation that a tax partnership would indicate.
What happens if I DO have a property partnership?
There are a number of consequences to having a property partnership – some good, some not so good! – as follows:
1. A Partnership Tax Return is required
While to a degree this is only an admin issue, it does mean another actual Tax return is required, meaning a new tax reference, and tax filing, and therefore additional fees from your tax adviser
2. Partnership losses can’t be offset against non-partnership rental profit
Ouch! This could be an issue if an investor has their own portfolio, and also invests on a partnership basis elsewhere but makes a loss – as that loss can’t be offset against their own portfolio.
3. Capital allowances could be restricted
Where a property rental business is deemed to be a ‘partnership’, this can restrict how capital allowances are claimed.
Specifically, an ‘entity’ can only claim for ONE Annual Investment Allowance claim – which means ONE partnership can only claim for half of what TWO joint-property owners can.
This rule has no relevance for single-let landlords operating with jointly-owned property, but can potentially have a huge negative impact on multi-let landlords operating with jointly-owned property – take professional advice if this applies to you!
4. More flexibility as to how profits are split between partners
Partnerships are often more about flexibility rather than tax-efficiency. Partners in a partnership can allocate their profit share in any way they wish.
So, for portfolios where the underlying ownership isn’t tax-efficient, rather than implementing multiple deeds of trust to change the beneficial ownership position, having a partnership can allow the required flexibility to split profits more tax-efficiently.
Does it make a difference to the partnership position if we own our jointly-held property as tenants-in-common or as joint tenants?
Yes …
Joint Tenancies are – by definition – are fixed, and so there is no option to change the ownership from anything other than 50—50.
Whereas …
Tenants-in-common arrangements are more flexible in that, via a simple deed- of trust, the percentage in which a property is owned, and therefore taxed, can be changed.
Therefore, it follows that substantial property portfolios held jointly on a Joint Tenancy basis are more likely to be deemed tax ‘partnerships’ by HMRC.
Summary
Generally, a property partnership is to be resisted if possible, as there are more tax and practical downsides than upsides. Sometimes, it’s difficult to avoid a large jointly-held property being deemed to be a property partnership – this is where professional advice should be sought, to ensure that unnecessary tax returns are not filed (hence added cost), and that there are no adverse tax effects compared to simple joint-ownership of property.