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BTL in Partnership Accounts


niccolo

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I'm looking at the forms
SA800 - Partnership Tax Return
SA801 - Partnership property return

The 2 partners are running their business as a general partnership.
They buy a propery in their own names and include it in the partnership tax returns.
The properties are either cash bought or mortgage and deposit.

Do the properties, mortages, cash, deposit get accounted for in the balance sheet and capital accounts?

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Yes in a nutshell but there is no requirement to have to show these on the tax returns although you should be keeping accounts to track for future disposals and whos entitled to what. It’s worth using an accountancy service provider and making sure a partnership agreement etc is in place.

Jerome

Jerome@TaxAntics.co.uk

www.TaxAntics.co.uk
 

 

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Thank you,

I am considering the implications of returning capital which was initialy lent by the partners after property is refinanced.

The key area I found interesting is;

Increasing a mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-case-studies#increasing-a-mortgage

A proprietor of a business may withdraw the profits of the business and the capital they have introduced to the business, even though substitute funding then has to be provided by interest bearing loans. The interest payable on the loans is an allowable deduction. This is on the basis that the purpose of the additional borrowing is to provide working capital for the business. There will, though, be an interest restriction if the proprietor’s capital account becomes overdrawn, see BIM45705 onwards.

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700

 

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As long as the partners don’t draw capital above their initial contribution, there should be no issues. HMRC did challenge this in the past and even changed their guidance during a tribunal although I believe this is all water under the bridge now. If partners refinance and use the capital for further acquisitions, then that interest is allowable.

Jerome

Jerome@TaxAntics.co.uk

www.TaxAntics.co.uk
 

 

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Thank you for the reply and yes, that's a great point.  I read about the change of guidance case.  Because of that I download the current guidance I am using.
https://www.accountingweb.co.uk/tax/hmrc-policy/hmrc-altered-guidance-to-deny-interest-relief


I am keeping the balance sheet and capital accounts to ensure the partners have their inital capital investment returned and they don't go overdrawn.

As capital introduced I am counting; the property value (accounting for; mortages, deposit or cash purchase) and any other costs associated with the property acquisition which qualify as capital costs such as stamp duty, solicitors fee,...

I have had a discussion about the base cost or market value of the property due to the guidance saying "the capital value of the property when it was brought into your letting business".

There have been some BVM deals, backed up by a survay value higher than the purchase price, the question arising is what is the capital value of the property,... Is it the purchase price or the survay value?

The HMRC Example shows;

The opening balance sheet of his rental business shows:

Mortgage £80,000 Property at market value £375,000
       
Capital account £295,000  

Also as you say "If partners refinance and use the capital for further acquisitions, then that interest is allowable. " That's what my reading of the guidance indicates. But I wonder if it must only be used for further acquisitions?

The phrase I am thinking about is "as long as the additional loan is wholly and exclusively for the purposes of the letting business."  So could the refinanced capital be used for other capital costs that meet the test?  So capital improvements to an existing property or repayment of capital on other loans not associated with the same property?

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The purchase price will be the initial value for the partners capital account with any survey difference being a revaluation reserve or deficit - if you’re strictly following FRS102 then you’ll be factoring this in annually.

The released capital can be used for other assets including the ones you mentioned and even things like purchasing a van for maintenance or a property development project - just as long as it’s wholly for the business and not extracted for partners personal use.

Jerome

Jerome@TaxAntics.co.uk

www.TaxAntics.co.uk
 

 

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