Ken Moody considers the sometimes vexed question of whether an activity carried on by two or more persons amounts to a partnership, with special reference to property letting.
Partnership Act 1890, s 1 defines 'partnership’ as:
“ … the relation which subsists between persons carrying on a business in common with a view of profit.”
It goes on to note at section 2 that joint letting of property does not ‘of itself create a partnership’.
Is there a ‘business’?
The first point, therefore, is that for a partnership to exist there must be a business. This is not the same question as whether an activity amounts to trading. ‘Business’ is a wider description than ‘trade’.
The distinction is relevant to the availability of certain capital gains tax (CGT) reliefs. For example, incorporation relief (under TCGA 1992, s 162) requires only that a business exists, whereas other CGT reliefs (gift relief under TCGA 1992, s 165 and business asset disposal relief under TCGA 1992, s 169) to name two – require that the business in question is a trade.
In Ramsay v HMRC [2013] UKUT 226 (TCC), Mrs Ramsay and her husband operated a property letting activity consisting of a large house divided into flats. The house was transferred to a company, and CGT incorporation relief under TCGA 1992, s 162 was claimed. HMRC rejected the claim on the basis that the property was an investment and not a business. The First-tier Tribunal (FTT) listed 17 activities carried out by the Ramsays in relation to the letting and maintenance of the property, which occupied some 20 hours weekly of their time. The FTT nevertheless decided in favour of HMRC, but the Upper Tribunal (UT) reversed their decision. The UT held that the activities outweighed “what might normally be expected to be carried out by a mere passive investor”. That is the essential question, though the list of activities in Ramsay might be instructive in similar situations.
Is there a ‘business’?
Whether the business in Ramsay was a partnership did not arise, although for income tax purposes the question is largely academic since the overall tax payable would normally be the same whether the activity is treated as a partnership or merely the joint letting of property. Indeed, the self-assessment tax return forms only appear to recognise trading partnerships, possibly because as far as HMRC is concerned property letting amounts to a business only exceptionally and almost never to trading. The latter is partly due to the principle established in Salisbury House Estate Ltd v Fry (1930) 15 TCC 266 that the income tax ‘schedules’ are mutually exclusive, albeit that the schedules themselves have been abolished. So basically, property income can only be taxed as such. The activities would need to go beyond the mere exploitation of proprietary rights, such as a hotel or guest house (NB caravan parks are a special case – see ITTOIA 2005, s 20 and CTA 2009, s 43).
However, whether a business or trade amounts to a partnership is a different issue. It is a question of fact whether a partnership exists, and there is a relatively small body of case law on the subject. Partnership Act 1890, s 2(3) states that the receipt of a share of the profits of a business is prima facie evidence that a partnership exists, but the factual nexus in decided cases varies considerably.
Practical tip
Neither a general partnership nor an LLP is required to have a partnership or members agreement, though an LLP is otherwise subject to the default provisions of the LLP regulations. However, such an agreement, while not conclusive, is useful evidence of the existence of a partnership, provided as always that its terms reflect the conduct of the parties. And I have seen counsel’s opinion suggesting that incorporation as an LLP is prima facie evidence of a partnership business.
