PIM1030 - Introduction: jointly owned property & partnerships
Jointly owned property
Where property is owned jointly with one or more other persons the way the rental income is taxed depends on whether the letting is carried on in partnership. Joint letting does not, of itself, make the activity a partnership.
Usually, there won't be a partnership and the customer’s share from the jointly owned property will be included as part of their personal rental business profits.
Less commonly, the joint letting may amount to a partnership. If this is the case the share of the profit or loss must be kept separate from any other letting income. A partnership loss can't be deducted from a personal rental profit and vice versa.
The property income rules will not alter a customer’s status. A partner will not cease to be a partner just because of the current rules. Equally, if a customer was not a partner before, they will not become a partner just because of the current rules. See below for more about the cases where a partnership exists.
Customers who have jointly owned property should know who is keeping the records and have access to them. They are personally responsible for including their share of the income in their own tax return even if they agree that someone else will keep the records.
Jointly owned property: no partnership
Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.
However, where the joint owners are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless:
both entitlement to the income and the property are in unequal shares, and
both spouses, or civil partners, must inform HMRC that their share of profits and losses is to match the share each holds in the property.
If a customer’s only income from land and property in the UK comes from a jointly owned property, that share alone will form the rental business. If a customer has other income from land and property in the UK, whether in their name alone or owned jointly with other people, their share from the jointly owned property will form a part of their rental business along with the other income and expenses on any other properties which they own alone. Once again, however, shares held in a different capacity (partner, trustee, executor) must be kept separate.
Jointly owned property: partnership
A customer may jointly own properties which are let out as part of a partnership business. This might occur where:
- they are in a trading or professional partnership which also lets some of its land or buildings (but see BIM41015 about the inclusion of rents from the temporary letting of surplus business accommodation in the trading or professional profit),
or
- more rarely, they are in a partnership which runs an investment business which does not amount to a trade and which includes, or consists of, the letting of property.
A partnership rental business of either type is treated as a separate business from any other rental business carried on by the individual partners on their own account. Each partner’s share of the profits or losses arising from the partnership rental business can't be added to or subtracted from any individual rental business profits or losses. If customers are in more than one partnership, each is dealt with as a separate rental business and the profits of one can't be set against the losses of another.
Partnership: example
Simon owns a holiday cottage and a garage both of which he rents out on a commercial basis. He is also a partner in a haulage business, which owns buildings let out to other traders.
In this case Simon runs two different rental businesses:
the first is his own business consisting of the cottage and the garage,
the second is the partnership rental business consisting of the trading premises let out.
Simon's share of the profits or losses from the partnership rental business must be kept separate from his other rental business. He will need to make a separate return of the profits or losses for each business on his tax return form.
When does a partnership exist?
Whether or not a customer is a member of a partnership depends on the facts. A partnership is unlikely to exist where the customer is one of a group of joint owners who merely let a property that they jointly own. On the other hand, there could be a partnership where the customer is one of a group of joint owners who:
let the jointly owned property, and
provide significant additional services in return for payment.
Much depends on the amount of business activity involved. The existence of a partnership depends on a degree of organisation similar to that required in an ordinary commercial business.
Bear in mind that the existence of a partnership can have important legal consequences quite apart from tax; the customer may be liable for partnership debts for example.
For more information about the tax treatment of partnerships see PM130000 onwards.
Legislation
You need to distinguish between:
- income derived from property held by a partnership (CTA09/S1270 (2), ITTOIA05/S859 (2)). In this case the income does not belong to the individual partner in his personal capacity and is not part of his own rental business,
and
- income derived from property which is jointly owned in circumstances which do not amount to partnership. In this case the individual joint owner does receive his share of the income in his personal capacity, and it does form part of his own rental business.
Merely holding property jointly does not constitute a partnership. An Officer of HM Revenue & Customs should see any case in which there is doubt as to whether a partnership exists and should consider it in the light of the guidance below.
When does a partnership exist: more detail
A partnership is defined by Section 1(1) Partnership Act 1890 (which is reproduced and discussed in PM133000) as:
‘The relation which subsists between persons carrying on a business in common with a view of profit’
It is not enough to constitute a partnership that property is jointly owned or that the joint owners receive a share in the rents derived from it (Section 2 Partnership Act 1890). For there to be a partnership there must be a business. This is defined in Section 45 Partnership Act 1890 as including ‘every trade, occupation or profession’ and is a wider concept than ‘trade’. Griffiths v Jackson [1982] 56TC583 suggests that letting property may sometimes be a business.
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 business apart from that. See also the general guidance on the nature of partnerships at PM130000 onwards.
On the other hand, where it has been accepted that a partnership already exists and has income from property belonging to the partnership, the presumption would normally be that the letting is part of the partnership business and there is more than mere joint ownership.
Whether a case is partnership or only joint ownership could become material where there are losses involved in that or other lettings. If there is a partnership, the letting will be part of a separate rental business and it will not be pooled with profits or losses from properties held by the partners individually.
There is advice on the basis of assessment to be used in the case of partnership property income at PIM1040.
Jointly owned property: husband & wife or civil partners
Husbands and wives or civil partners living together should generally be treated as entitled in equal shares to income from jointly held property. See:
ICTA88/S282A for years up to 2006-07, and
ITA07/S836 for 2007-08 onwards.
However, this rule will not apply in any of the following instances:
the income is earned income (or, like furnished holiday lettings, treated as earned income); ICTA88/S282A (4)(a), ITA07/S836 Exception D,
there is actually a partnership; ICTA88/S282A (4)(b), ITA07/S836 Exception C. In this case the income is divided according to the terms of the partnership agreement,
both husband and wife, or both civil partners, have signed a declaration under ICTA88/S282B or ITA07/S837 stating their beneficial interests in both the property and the income arising from it. However, a declaration is only valid if their interests in the income and in the property itself correspond.
Further guidance can be found at TSEM9800 onwards. Any problems about joint ownership which cannot be dealt with by reference to the TSEM guidance should be submitted to HMRC Trusts Bootle.
Further guidance
For detailed guidance on the taxation of partnerships see PM130000 onwards.