In the first of a special two-part series, Tax Insider explores ways in which you, as a landlord, can reduce your income tax bill through an arrangement called ‘Property Partnership’.
What’s a Property Partnership?
A property partnership exists when two or more people own a property in joint names. This is usually done either as:
Commonly used when marital couples buy a property together, as when one of the joint tenants dies, the surviving tenant becomes the sole owner, or
Tenants in Common
Often used when the owners of the property register separate ownership, so that when one of the ‘tenants in common’ dies, the property does not necessarily become the ownership of the surviving tenants.
Is a Property Partnership right for me?
The two most important conditions that must be satisfied before entering a property partnership are:
Beware - If you’re a nil-rate tax payer, don’t partner a higher-rate tax payer as you’ll pass on income tax liability to your partner. Instead, you might want to keep the property in your sole name until your tax liability from your rental profits is equal to or more than that of your partner.Marital Partnerships
- Your partner must be a lower rate taxpayer than yourself; that is, if you pay tax at 40% or more, your partner should pay tax at 20% or less;
- You must be able to trust your partner(s)
HMRC treats all properties bought between husband and wife as a 50:50 split unless otherwise stated, so property rental profits are taxed equally. If one partner is a nil- or lower-rate tax payer especially, you can save a considerable amount of tax.
Here’s an example to demonstrate the savings you could make:
Married couple, John and Lisa buy an investment property. John is a 40% tax payer and as a home maker, Lisa has no income. They’ve invested in a 2-bed house for £80,000 and have split the property ownership 90:10 in Lisa’s favour, having produced documentary evidence to support this and informed the HMRC.They make £6,000 annual rental profit, making Lisa’s profit £5,400 and John’s £600. Lisa has no tax liability as the profit is within her tax allowance and John pays £240 (40%) on his £600 profit.Had they remained as 50:50 partnership split, the joint tax liability would have been £1,200 (40% of John’s £3000 profit share).Non-Marital Partnerships
It’s important to note that if you buy a property as a non-marital partnership, you must inform the HMRC of the ownership and how it should be split . So, for instance if you buy a property in a partnership with a friend, in which he or she provides 70% of the deposit and you provide 30% of the deposit, then you must also inform HMRC of the 70:30 split.Next time in Part 2 of his special guide, Tax Insider shows you how to go about setting up a Property Partnership in three easy steps.