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We are a husband & wife team, we spend more than 50 hours between us a week self managing and running our rental portfolio. We are professional landlords and all our properties are owned jointly under our personal names.Our plans are to incorporate by the year 22/23. We have been gathering up letters from most of our third party services to confirm that we are indeed self managing our business.
We have been advised by an accountant that we should now begin submitting partnership annual returns in addition to our usual SA returns for three years, whilst another has said that we can't utilise our SA losses if we do that and that we would have to allow the losses to not be utilised, then create a partnership now for three years then Ltd Co afterwards !
Our circumstances include the fact that we are carrying over lots of losses in our self assessments from prior years, and what we want to do is not incorporate fully until those losses are all used up.
We have been told that HMRC now requires us to create a partnership for three years prior to full incorporation however how does that fit in with the fact that we have losses in our SA's?
Has anything changed in the last couple of years from HMRC requirements that we don't know about with regard to a partnership for three years, or can we simply put our case forward at that time and evidence the fact that we fully self manage ?
Do we still have to run partnership for three years or are we indeed already classed as a partnership without submitting partnership returns ?
Can we bring in our losses into the partnership ?
Can we not simply run down the losses, then in three years time create a partnership and then a Ltd Co straightaway in one go ?
The Partnership Act 1890 Act describes a partnership as ….
'the relation which subsists between persons carrying on a business in common with a view of profit.”
Does anyone have any comments or advice who have gone through this scenario or who have detailed knowledge of this particular issue ?
If you have taken advice from your account why are you asking the questions today
are you unsure of the advice you have been given
Learn Change and Adapt ?????
All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.
** This is not advice, as I have no knowledge of your personal circumstances, and is purely opinion **
Your first accountant has outlined the process correctly ref. the partnership (albeit you may only have to do for 2 years ... but this is yet untested, so 3 would be safer, you'd have to take a view). Your other accountant's view has explained how this affects your current personal rental losses and again is correct. Nothing has changed.
Currently you are submitting your rental income etc on the property pages of your SA - property investor.
The change to a more formal partnership will mean that you are shifting those numbers to the partnership section of your SA and compiling partnership accounts - a business.
No you will not be able to bring the losses into the partnership, they are personal. Also, if you cease the personal activity of property investment, these losses will be lost after a period.
No you won't be able to just run down the losses... then to partnership ... then to Ltd co. immediately as the partnership would be seen as an artificial step purely taken to gain a tax advantage and fall foul of GAAR (General Anti Avoidance Rules).
Whether it is right to incorporate will depend very much on your personal circumstances and your future plans, which I am sure you outlined to both accountants at the time.
The questions you have asked both accountants have been met with correct answers. They may not be the answers you want to hear, unfortunately, but in my opinion are correct.
This is a complex area, where in my view many snake oil salesman now operate punting various untested schemes of dubious validity. I am sure you'll be contacted by some, or they'll post.
Be careful, pay to get good advice, and follow it.
Always stay on the right side of HMRC - just look at the Easy Jet pilots now suffering with dubious loan schemes that were all "valid solutions" .... "had barristers opinion" .... etc. Look at the film partnerships, where many have now lost their shirt and more.
Incorporation, schemes that look like incorporation or avoid actual incorporation but create complex structures will be a happy hunting ground for HMRC in years to come.
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You have given some great advice
I know I took opinion of three accounts and I opted for what I call the "landlord shuffle" where I sell my own properties at market value into my company
My view was I wanted to sleep at night and the shuffle was the way to do it
I would rather pay the stamp duty and CGT ....
do you also have to transfer the ownership of the rentals into the name of the new partnership?
Excellent response thanks John !
with regards to your answers;
‘these losses will be lost after a period’
How long can the losses be carried for, eg; can we stop utilising the losses now and start using them again in a year or two, so maybe analyse wether it’s best to submit this years YE Apr 19 accounts via Partnership or SA route, anotherwords can I mix or match.
also how would you play this out ?
Would you stay as you are and run down the losses for a few years, or submit partnership now year end Apr 19 which is a 50% of mortgage interest costs year, and again the next two years bearing in mind that our business is highly geared and doesn’t produce any profits at the moment in fact we have a loss figure at the moment for YE Apr 19 to go with our previous losses.
Any unrelieved losses can be carried forward indefinitely against the same property business, however if your business is now "sitting" in a partnership then your personal rental business has ceased as rent is no longer received in your personal name.
I think it would be difficult to argue that the cessation was temporary .... when you are arguing the business is transferred to a partnership then potentially to a Ltd co. later on.
Your 2nd question - it would depend on the level of losses that you had.
It would be a number crunching exercise to look at continuing as you are and using up the losses (whilst the staged introduction of S24 comes in) and then trading as a formal partnership for 2-3 years vs. going the partnership route immediately. Crunch both scenarios and see which one comes out best from an overall tax perspective (taking into account any cashflow issues ref. any taxes payable).
As previously said, you'll get lots of offers for other schemes whether that be BICT, mixed partnerships / "hybrid", "BTL restructuring" .... not a fan of any of them to be honest as there seems to be issues with each in my view and nothing has been tested in Tribunal with HMRC, or in Court with the mortgage lenders so wide open.
Hope that helps
Looks like you're broadly getting the right sort of advice, but as usual it's woefully incomplete and incorporating your portfolio will turn out to be a very costly mistake.
There are proven alternatives, and if you look at the subject as a whole on this site you'll see more detailed reasons why going to limited is a bad idea.
If you're going to be in London on the 21st, then you can get a much better idea of your options by attending the Landlord Investment Show at Olympia.
Less Tax For Landlords
0203 735 2940
Thanks Tony, I will be at Olympia and I'll approach you when I'm there !
Looking forward to it!
Not sure where you got to with this.
The three year rule is not required. Technically there is no time limit but of course anti-avoidance rules would kick in you had a partnership for a day. As to a partnership tax return well again this is not required (although highly recommended). The reason for three years is that you are I presume going to withdraw funds before incorporation and so extract funds tax free. But if its within 3 years of transferring property into a property investment partnership then SDLT will be triggered on the extraction.
Chartered Accountant, Tax Advisor and Mortgage broker
(and BTL portfolio owner)