Introduction
The current recession is affecting virtually everyone, including property investors. Many buy-to-let investors are finding it increasingly difficult to find tenants, and some are making significant losses.
Properties owned by a property investor generally constitute a single rental income ‘business’, and there is normally little difficulty in setting off a loss from renting one property against a profit from another. However, what is the position for the property investor who owns some properties in his/her sole name, but only has a joint interest in others? Do the different property interests constitute a single rental income business, so as to allow effective relief for losses?
HMRC’s approach is that rental business activities are treated as a single business if carried on by the same person in the same legal capacity. For example, an individual could own investment property in his own right, and be the trustee of a trust in receipt of rental income. These would be treated as separate rental businesses.
Jointly owned property
What about jointly owned property? HMRC’s view seems to be that the taxpayer’s share from jointly owned property will usually be included as part of their personal rental business profits or losses. However, if the letting is carried on as a partnership, the taxpayer’s share of the rental profit or loss from the property rental partnership must be kept separate (e.g., a share of partnership losses cannot be deducted from personal rental business profits).
A potential difficulty is in establishing where a partnership exists. There is case law (HMRC often cite an old case, American Leaf Blending) to support the view that letting property can constitute a business. However, it may be difficult in practice to distinguish between a business and an investment.
HMRC’s guidance states the following (PIM1030):
“Most cases of jointly owned property will fall short of the degree of business organisation needed to constitute a partnership. To accept that a partnership exists you would have to be satisfied that there is a similar degree of business organisation as in an ordinary commercial business. This means more than treating rental income as derived from a business of letting property - it must be a business apart from that.”
Spouses or Civil Partners
The tax position is different for property owned jointly by husband and wife (or civil partners) who live together. The general rule is that they are treated as entitled to property income in equal shares. However, there are six exceptions to this general rule for income tax purposes (in ITA 2007 ss 836 & 837). One of these is that the income is from a partnership. Another exception is that the income is earned income, such as from furnished holiday lettings. A further exception is where the spouses are beneficially entitled to the property income in unequal shares in accordance with their unequal beneficial ownership of the property, and make a joint declaration to be taxed on that basis.
HMRC’s view of partnerships being a separate legal entity appears to contradict a general principle of English law, that a partnership has no separate legal identity from its owners (although the position is different with LLPs, and also under Scots law). It is possible that their approach may be tested in the Courts one day. In the meantime, taxpayers and their advisers need to be aware of HMRC’s view - unless they are the ones wishing to challenge it!
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