Partnerships as property investment vehicles
UK property investment can be made using several different structures. Having discussed the pros and cons of direct property investment in my last article, in the second part of this series I’ll be looking at partnerships.
What is a partnership?
A partnership is simply an agreement between two (or more) people to own a business between them. It’s a step up from direct ownership, putting what may otherwise be a ‘friends’ agreement’ onto a business footing. Each partner owns a share of the business, and the profits and income are directly distributed to them (as are losses). Each partner is responsible for paying income and capital gains tax personally – this eliminates the double taxation that can occur in limited company structures: a major advantage over company structures.
What is the difference between limited liability partnerships and general partnerships?
In a general partnership, the partners are liable to make good all losses incurred by the partnership. The partners could act independently on behalf of the company without gaining the consent of the other partners.
A limited liability partnership (LLP) is more formalised. There is an agreement between the partners as to the role and responsibilities of each partner, and partners can elect to be non-active in the business. The liability of each partner is limited to their initial contribution into the partnership. The partners can tailor how the partnership operates to benefit from each partner’s specialisations, though this can also lead to a lack of control of partners who have no management function.
In both types of partnership, the profits and income are distributed in line with the partners’ share of the business. It is then the responsibility of the individual to declare and pay their tax.
It’s worth mentioning that limited partnerships and limited liability partnerships operate quite distinctly from each other. In a limited partnership, at least one general partner must manage and take on all the risk of the business’s operations – the other passive partners have no liability.
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Stamp duty land tax and partnerships
If you transfer properties into the partnership, you may have SDLT to pay (just as you would have to if you were to transfer the property to your spouse).
To recap about partnerships
- The profits made within the partnership, whether made by capital gain or rental income are divided between the partners.
- Each partner pays tax at their marginal rate on their share of the profits.
- The shareholding of the partnership can be changed year-to-year so that partners can benefit from their individual tax positions.
- Partners also pay their taxes on the profits from their partnerships on an annual basis, and not via PAYE – this can be a handy cash flow benefit.
- SDLT may be payable on transfers into the partnership.
- Partners in a limited liability partnership have their liability capped at the amount they contributed into the partnership.
In a company structure, profits are taxed at 20% (being the rate of corporation tax). Distributions (by way of wages, bonuses, and dividends) are all liable to tax (though the first £5,000 of dividends is tax-free).
As with a company structure, mortgage interest is treated as an expense within a partnership, and so is deducted in full from the income before profits are distributed to the partners. This means a potential saving for higher rate taxpayers, though the interest relief can’t then be claimed against the individual’s tax liability.
With these tax advantages, it’s not surprising that new property investors are increasingly considering investing in a limited liability partnership structure. However, they can be expensive to set up and transfer existing properties into, so before you jump into setting up an LLP you should seek advice and weigh up the advantages and benefits versus both direct investment and investing as a limited company.
If you’d like to speak to an accountant with expertise in the property investment and partnership and company process, feel free to contact one of our team today on +44 (0)207 923 6100 – we’ll be happy to recommend a suitable accountant to help you.
In my next article rounding off this mini-series about how to make UK property investment, I’ll look at the advantages and disadvantages of investing in property as a limited company.
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P.S. Download our book, “The Non-Accountant's Guide to UK Property Tax” today. It’s the definitive guide for all those investing in UK property.