How can a limited liability partnership save income tax on a rental property portfolio?

Owners of large property portfolios are often driven into higher rate tax because of the section 24 tax rules or simply because the rental income from their property portfolios is quite large

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Owners of large property portfolios are often driven into higher rate tax because of the section 24 tax rules or simply because the rental income from their property portfolios is quite large.

When properties are held personally the income profit must be distributed and all taxes paid within the tax year that they arise. In addition, if the property portfolio is owned by a married couple, legally the distribution of the income should be in accordance with the ownership of the properties – usually 50/50. Sometimes that doesn’t save tax.

Once the LLP partnership is set between a husband and wife, the income can be distributed in any way the partnership sees fit. 99% of the income can go to one person and 1% to the other. This can save income tax in circumstances where one person already has an alternative income coming in – for example state pension or final salary pension. By changing the distribution of the income to the two partners that will save income tax especially if it drops the one partner below the 40% tax rate.

Within a partnership the property income can be adjusted to make sure that neither person is driven into a higher rate tax. If there are children over 18 years of age, income can also be distributed to them. They can be partners for the income but not for the ownership of the properties – if you transfer the properties to them, capital gains tax and stamp duty land tax will be payable.

Sometimes adult children are at university, or they are working with very low income and therefore distributing income to your children can save tax overall for the family. If you have a non-tax paying child at university – currently students have an allowance of £12,500 of tax-free income per year that you can utilise.

Utilising the various allowances and changing the way that the income is distributed once properties are held in a partnership can save significant tax for the family overall.

WE do both the setup work and the legal work required to set up a partnership and advise all client to set up limited liability partnerships to protect their other assets.

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