Landlords - Which Hat Are You Wearing?

James Bailey looks at property businesses operated in different capacities, and the tax implications.

 

If you own property in the UK and receive rent as a result, you are running a UK property business. Tax law says that all such UK lettings are to be considered as one business, so a loss on one letting property can be set against a profit on another. Effectively, all the rental income and all the landlord’s expenses are stirred up together in the same pot to produce one profit or one loss for tax purposes.

It is important, however, to be aware of the limits of this concept. Some specific types of letting are separate businesses with different rules, such as lettings under the rules for furnished holiday accommodation, and any lettings of property outside the UK are obviously not part of a ‘UK property business’.

There can be problems, however, where a landlord receives rent in more than one capacity. 

Trusts and trustees

Property income received by a trust is normally taxed as the income of the trust, but in a case where the person who set up the trust (the ‘settlor’) is able to benefit from it (or his spouse or children under 18 can), the trust’s income is treated as that of the settlor for tax purposes. This does not, however, allow the settlor to set a loss on trust property income against a profit on personally owned property, or vice versa. They are two separate property businesses.

There is one rather technical exception to this rule – if the settlor is also the ‘life tenant’ of the trust (meaning he has a legal entitlement to the trust income) and he runs the trust’s rental business himself (doing this involves some rather complicated aspects of trust law), then that is part of his own UK property business and is included with any other UK property income he may have.

Partnerships and joint owners

Generally speaking, HMRC will resist the idea that a rental property owned by more than one individual means that the letting is done by a partnership. They will argue that a partnership involves ‘carrying on a business in common with a view to profit’ (Partnership Act 1890, s 1). They then argue (as they do for other taxes as well) that the word ‘business’ in the Taxes Acts’ frequent references to a ‘property business’ somehow has a different meaning to ‘business’ in the Partnership Act. 

In some cases – where the partnership has a number of properties and is clearly run in a business-like way, or more often where the partnership carries on some other trade and happens to have some letting income as well, HMRC will accept that the property is being let by a partnership.

This is important because it also means that any profits or losses from the letting allocated to an individual partner cannot be lumped in with any other property income he may have in his own right, because the partnership’s UK property business is a different business to the individual partner’s UK property business.

Where property is jointly owned and there is no partnership, however, the owners may allocate the profits or losses as they choose among themselves (subject to special rules for married couples or civil partners).

Unlike partnership property income, your share of the profits or losses from a jointly owned property are part of your ‘UK property business’ and included with any profits or losses from property in the UK that you own as the sole owner.

When calculating the taxable profits and losses of your property business, make sure you remember which hat (partner, trustee, joint owner, or sole owner) you are wearing!