In this article our guest writer, Amer Siddiq, from Tax Insider will provide you with helpful tips on property partnerships, in the final instalment of the two part series. There is no doubt that owning properties in a partnership can be an excellent income tax–saving strategy. In this article you will learn about the different types of partnerships and how to declare a partnership split to HMRC. Partners must be trustworthy If you buy property in a partnership, then you MUST make sure that the partners with whom you are purchasing are people who you implicitly trust e.g, a spouse, your mother, your father, etc. This is not just for tax reasons; it is simply good business practice. Partnerships between husband and wife HMRC will treat all properties purchased between husband and wife (other than shares in a close company) as a 50:50 split, unless otherwise stated. This means that unless you tell HMRC otherwise, you will both be taxed 50:50 on any property rental profits. A considerable amount of tax can be saved by having a property jointly owned by husband and wife, especially if one or the other is a nil- or a lower-rate taxpayer. It is important to note that if you intend to have a property between husband and wife as a non-50:50 split, then you must have an agreement between the two of you to say that this is the case. It is not enough to just make a declaration to HMRC stating that a property is owned in unequal shares. It must actually be owned in this manner, and documentary evidence must be made available if requested by HMRC. The following case study illustrates this scenario along with considerable tax savings: Potential tax savings between husband and wife After five years of marital bliss, John and Lisa decide to buy an investment property. John is a 40% tax payer, whereas Lisa is a homemaker and therefore has no income. They buy a two-bedroom terraced house for £80,000. They decide to have the property as a 90:10 split between the two of them in favour of Lisa and produce documentary evidence to support this. They also inform HMRC of this split. (The property is split in this manner to take advantage of Lisa’s personal income tax allowance—in other words, they want to reduce their tax bill!) They make £6,000 rental profit on the property on an annual basis. This means that the profit is split as follows:
- Lisa’s share of the profit is £5,400
- John’s share of the profit is £600
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