Meg Saksida explains the distinction between a partnership and simple joint ownership.
When a property is held jointly, whether by a spouse or civil partner combination, friends or joint investors, the question will often be raised as to whether the enterprise is, in fact, a ‘partnership’ or whether it is simply one or more properties held in joint ownership.
The answer to this question is important; if it is genuinely a partnership, the partnership will be subject to the provisions of The Partnership Act 1890 and taxed on a slightly different basis than it would be with two individuals.
If the lettings are not a partnership, each investor will be taxed on their share of the net rental profits chargeable to tax according to their ownership percentage of the properties. Sometimes this is precisely determined, and sometimes (in the case of spouses and civil partners) this is assumed by HMRC. The net income from the properties will be merged with all the other let property income that the individual has, either in their own name or combined with other separate joint owners, to form one UK letting business.
If the lettings are a partnership, on the other hand, the investor will be treated as having earned partnership income. The income from the rental property will be only a part of the total partnership income which has been earned through trading or other activities and will be based on the proportion of the taxpayers’ share of the partnership profits rather than a share of the property.
It is important to differentiate the type of income that has been received by the property holding, as any loss on a partnership trade cannot be offset against a gain on a letting business (and vice versa).
No partnership and property is simply jointly owned
The taxation of jointly owned income depends on whether the joint owners are in a marriage or a civil partnership. If they are, HMRC will assume the couple earn 50% of the jointly owned net profits each, irrespective of their actual ownership share. Sometimes, it is unwise to challenge this and other times, challenging this could save tax.
For example, Mike and John are in a civil partnership. Mike gave John 10% of his buy-to-let when the couple first formed their civil partnership ten years ago. Mike is a CEO and an additional rate taxpayer. John stays home and looks after the couple’s children. For Mike and John, it is advantageous to leave the rental income taxed by HMRC at 50:50, as this means that half of it is taxed at John’s lower tax rate. If HMRC were advised to tax the couple on their actual ownership, 90% would be taxed at Mike’s marginal additional rate, and only 10% would be at John’s lower basic rate.
On the flip side, if John had given Mike 10% of his buy-to-let (rather than the other way around), the couple would be advised to alert HMRC to the precise beneficial ownership percentage. This would lead to less tax being paid by Mike and more by John.
Advising HMRC is achieved by both individuals signing a completed Form 17. This form will advise HMRC of the actual legal ownership and forthwith, the actual split will be used to tax the income rather than the standard 50:50. A Form 17 may only be completed if the property is held as ‘tenants in common’, so any notification to HMRC must be precluded by the severance of a joint tenancy. The form must be sent to HMRC before 60 days passes from the date of the last signature to remain valid, and once HMRC has received it, any future income will be split in accordance with the beneficial ownership.
If the property is beneficially held 50:50 but the couple wish to be taxed in a different, more advantageous way, the CGT ‘no gain no loss’ spousal or civil partner rules can be invoked in order to split the property more constructively between them. The costs of creating the split (such as the legal costs for severing the title and the cost of changing the ownership at the land registry) and any other non-tax implications should be considered before this step is taken. If the joint owners are not married or in a civil partnership, HMRC does not automatically assume a 50:50 share of the net profits. Usually, the joint owners will wish to receive and be taxed on their beneficial share of the profits earned. However, this is not obligatory.
For example, if the joint owners are close friends or siblings; they may agree between them that, contrary to the actual beneficial ownership percentage, one of the joint owners may have more or less of the profits than the other and, likewise, be taxed on their receipts accordingly. The only requirement HMRC insists on is that the income share they receive is the same as the income share they are taxed on. For example, in a group of three owners, one basic and two additional rate taxpayers, the income cannot be split three ways but all taxed on the basic rate taxpayer.
Examples of a partnership
A partnership could occur in two circumstances. The first is where there is already a trading partnership.
For example, two friends who met at university whilst they were both studying psychology open a therapy practice, and structure the venture as a partnership. They have trading income from therapy receipts, so they are already a genuine trading partnership. If, in addition to these receipts, they earn property income from letting out the basement of the building that they use as their offices, this would be property income that arises inside their partnership. Each friend’s share of this income to be taxed would be calculated based on their share of the partnership and this would be earned and taxed as rental income as a part of their partnership income. It would not be part of a UK property business.
The second circumstance is described by HMRC as being “more rare”. This circumstance would occur if the only activity of the joint owners is letting properties, but they do so not as a trade (as the letting of properties is not usually seen as a trade) but as a business. In these cases, there should be a “similar degree of business organisation as in an ordinary commercial business”, which would be unlikely if it is a simple letting business, which is why this type of partnership is rare. The business income would need to be in excess of simple rents. There would need to be additional services, such as cleaning, cafes, babysitting, car washing, bars, receptions etc., and not just simply the collection of rent.
Practical tip
It is crucial to understand whether a property partnership is being run or whether the owners simply own property together as the decision will affect how the income is taxed. If jointly owned, it is also critical to establish whether HMRC will assume a 50:50 split or require the actual beneficial ownership to tax the income.
