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How mixed partnership work for tax planning purposes

A mixed partnership is a business strategy in which, for example, you form a limited company to manage your properties. This limited company becomes a formal partner in your business.

This business structure is ideal for people who manage their own properties, but find it’s not viable to fully incorporate their business. Making the limited management company a partner makes incorporation simpler if you wish to do so later.

Making future incorporation simpler

Incorporation is easier in this way as it acts as a counter against any HMRC suggestion that you wouldn’t qualify for incorporation relief. If your management company isn’t a partner of your business, then HMRC could point out that you are not incorporating the ‘whole business’. They could also counter that you are not actually a business, rather you’re acting a passive investor in a separate company.

Mixed partnership in the rental property sector allows the company partner to charge up to 15% of the gross rental income in return for its management activity. This would protect it from the HMRC alienation of income rules. It would also reduce your income and therefore the tax for which you’re liable.

Tax benefits of mixed partnerships

The management company would pay tax at the 19% rate that currently stands for corporation tax. This is due to be reduced to 18% next year and 17% the year after. This is much lower than your personal tax rate would be as a high rate tax payer.

You could also use your annual tax-free dividend allowance (currently £5,000) to take money out of the company if you need it. Any profits over this could then be retained and further invested into the business. The limited management company could also be used on more rental property investment.

In this circumstance, you wouldn’t be transferring legal ownership on any properties, so there’s no tax to pay. You’d also be leaving your current mortgage arrangements undisturbed.

Steps to take

At Turner Little, the team can deal with every legality surrounding the partnership agreement and its overall formation. Before proceeding with this strategy, we can also advise on whether it is the best tax planning strategy for your needs.

There are steps you can take to formalise the structure for the mixed partnership, if you are certain it’s the right move for your business. Certain steps are compulsory, and others are recommended by the experts at Turner Little.

What you must do:

  • Complete form SA400 and file with the HMRC. This is a formal application to register the partnership. For this you will need a business trading name.
  • An SA401 will have to be completed and filed with the HMRC for each partner. This will officially appoint the partners and formally register it with HMRC.
  • An SA402 will also have to be completed and filed by each partner.
  • Note that the SA401 talks about paying Class Two National Insurance (NI) contributions, however, NI payments by landlords are optional.
  • When you receive HMRC confirmation that your mixed partnership application has been approved, you will receive a Unique Tax Reference (UTC) specifically for the partnership.
  • You will need the UTC to submit an annual partnership tax return using form SA800.

We also recommend:

  • Once you have your approval and UTR, you should open a bank account using the trading name of the business. Make sure that all ensuing business transactions pertinent to the partnership (mortgage payments, insurance payments and rent collection) go through this bank account.
  • Set up a business website.
  • Organise business stationery, including business cards and letterhead.
  • Set up a business phone number and email account.
  • Appoint an accountant with extensive experience of property partnerships.

The recommendations above are helpful as and when you reach the point that incorporation is viable. This is due to the need to show HMRC that you are running a viable business entitled to incorporation relief, rather than looking after an investment portfolio which wouldn’t.

Turner Little and its affiliates do not provide tax, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.