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For the purposes of this piece, I will be solely focussing on The Partnership Act 1980 however, it is worth mentioning there is more than one partnership such as Limited Liability Partnerships which I will not be discussing in this piece.

A partnership is legally formed by two or more people carrying on a business with a view of profit.

A partnership exists when partners receive a proportion of the profit and income in accordance with their interest and the partners contribute to the management and decision making of the partnership. The partners personally share responsibility for the business including any losses the business makes and any debts.

Liability for debts is on a joint and several basis, meaning creditors of the partnership have a choice who they wish to sue and can decide if they wish to pursue all the partners for the debt.

The Partnership Act  sets out requirements the partners are required to fulfil such as notifying any persons who deal with the firm of change of partners, placing an advert in the London Gazette to notify everyone when a partner leaves or the partnership is dissolved.

If a partner enters a contract in the usual course of business, they bind the other partners to the terms of the contract.

A partnership agreement governs the relationship between the partners. The agreement is useful in dealing with any disputes, deciding how decisions will be made and how the partnership will be run on a day-to-day basis. The agreement will stipulate what percentage each partner holds in the partnership and any capital contributions and income will be taxed on the partners own Income Tax and Capital Gains Tax.

A partnership is a useful starting point for potentially incorporating a property portfolio. If partnership assets are held for at least three years and it can be shown that the partners spent twenty hours a week on the business of the partnership, then the partnership can be incorporated to become a limited company. What this essentially means is that you exchange your share in the partnership for shares in the company without any consequences in capital gains tax or stamp duty land tax (there might be stamp duty land tax charge if the company is assuming liability such as having a property remortgage in its name).

Once the property is in the company structure there are additional benefits including:

  1. Reduced initial tax- rent would be taxed at 19% corporation tax rather than your marginal income tax rate.
  2. Reduced capital gains tax- on any subsequent sale of property any gains would be taxed at 19% rather than 28% in your name.
  3. Asset protection- with an appropriately drafted shareholder agreement you can make sure if any of your children get divorced in the future that their ex- spouse cannot take a share of the company.
  4. Inheritance tax planning- you could pass your shares to your children (or different classes with no control) and get wealth out of your estate to reduce your overall inheritance tax bill.
  • By Nafissa Yousaf, Trainee Solicitor