Tax implications on property developing with silent partner

drummer_666

Hello,

Me and my brother are going to inherit some money and as I'm already a property developer (on third house now), he is going to be a silent partner on the next one, both putting in 50%. Cash buyers.

Some people don't agree on business with family, but I've done it before and it works for us. It also means I can secure ownership of the next property before this current one is finished, so no waiting around for 3-4 months with no work to do.

I was originally thinking, he'll just lend me the money, buy the house in my name and once sold share the profit, minus my wage. He's agreed to this.

However, I was thinking then I have to pay tax and National Insurance on all of the profit. I can't imagine I'll be in the higher tax band even with the two properties in a year, so shouldn't 'lose' more tax this way, but maybe NI?

Would it maybe be better to buy as Tennants in Common?

I don't know if legal fees will be affected if buying in my name or as Tennants in Common either.

What about when it comes to selling? I'll probably be travelling when the joint property is put on the market. In the past I've done this and got my dad to act as Power of Attorney, which I had to pay to set up and then pay a fee to the conveyancer for dealing with POA. This time if we're shared owners can I let my brother do all the legal work regarding the sale such as signing contracts?

atush

you will pay tax (not sure about NI dont think so) on the income and the capital gain.

So you'd pay his tax too if his name isn't on it. then there is the CGT on sale. Which if his name was on it, you'd get 2x a cgt exemption so if he isn't on it, you'll pay more tax there too.

So get his name on the docs, even if he is just putting in money and doing no work. But if he isn't doing any work on it at all, 50% of the profits are a little high so i'd adjust to 60-40 or something.

If he refuses to put his name on, you split the profits and gain AFTER you take his tax back.

drummer_666

50% is fair because I'm getting an hourly wage for all the hours I put in viewing properties and working on the house. This, along with purchase, legal, renovation costs etc is taken off to get the profit. Plus, he's doing me a favour!

I know I'd pay his tax too and that'd be fine because I'd minus that from his profit before passing that on.

I dont pay CGT because I'm developing and therefore pay income tax

Archi_Bald

drummer_666 wrote: »

I dont pay CGT because I'm developing and therefore pay income tax

If you dispose of a property that is registered in your name but is not your prime residence, CGT law applies.
https://www.gov.uk/tax-sell-property/what-you-pay-it-on

booksurr

atush wrote: »

you will pay tax (not sure about NI dont think so) on the income and the capital gain.

So you'd pay his tax too if his name isn't on it. then there is the CGT on sale.

wrong

Archi_Bald wrote: »

If you dispose of a property that is registered in your name but is not your prime residence, CGT law applies.
https://www.gov.uk/tax-sell-property/what-you-pay-it-on

wrong

in contrast to both of you, the OP all too clearly shows he is fully aware of the correct tax implications of undertaking property development as opposed to property investing. The former is trading and is liable to income tax, the latter is investing and is liable to CGT

OP you can resolve liability to income tax on the whole value by making your brother a beneficial owner through a Declaration of Trust. that is simply a document which records how you will split the profit share between the two of you. You can be the 100% legal owner but a DoT establishes the concept of beneficial ownership split and therefore your brother's entitlement irrespective of his lack of legal ownership

a DoT can be drawn up between the 2 of you without the need for a solicitor - read this:
http://www.hmrc.gov.uk/manuals/tsemmanual/tsem9520.htm

Archi_Bald

booksurr wrote: »

wrong

wrong

in contrast to both of you, the OP all too clearly shows he is fully aware of the correct tax implications of undertaking property development as opposed to property investing.

If anyone is wrong here, it is you. As - in contrast to you - we have read what the OP posted and we responded to the query.

drummer_666 wrote: »

I was originally thinking, he'll just lend me the money, buy the house in my name and once sold share the profit, minus my wage. He's agreed to this.

However, I was thinking then I have to pay tax and National Insurance on all of the profit. I can't imagine I'll be in the higher tax band even with the two properties in a year, so shouldn't 'lose' more tax this way, but maybe NI?

Would it maybe be better to buy as Tennants in Common?

I don't know if legal fees will be affected if buying in my name or as Tennants in Common either.

booksurr

Archi_Bald wrote: »

If anyone is wrong here, it is you. As - in contrast to you - we have read what the OP posted and we responded to the query.

I take it you do not understand the implication of:

drummer_666 wrote: »

I'm already a property developer (on third house now), he is going to be a silent partner on the next one,

a property developer can quite easily own a property whilst working on it, said ownership can either be as sole, TIC or JT since those are the only options for owning property in the UK, but makes no difference at all to income tax v CGT

http://www.property118.com/tax-treatment-property-development-vs-property-investment/31172/
defining trading is exhaustively covered (as any accountant will tell you) by the "badges of trade", if you do not understand that concept then start here
http://www.hmrc.gov.uk/manuals/bimmanual/BIM20200.htm
and pay particular attention to:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM20210.htm

the brother does not have to be actively engaged in physically doing the work in order to be liable to income tax rather than CGT, since the intention from the outset is to trade as a (silent) partner in a property development business with a existing history of trading

to answer the OP's question:
- if purchased as TIC (or JT) that will codify the profit share as the respective ownership shares
- if purchased as sole owner a DoT would be required in order to avoid all the profits (and costs) falling on the owner

technically speaking an accountant would also advise you to treat your arrangement with your brother as a "proper" partnership since that is how HMRC will see it. As such you would then need to submit accounts for the partnership as well as each of you separately doing your own tax returns

drummer_666

thank you for your help

I think in that case I'll just put the property in my name with a DOT as then there will be no partnership tax return which is a bit of a faff. and it's the same outcome tax-wise. So long as it's same for NI as well

I'm a 'she' btw

dave2

Do the tax returns properly, otherwise it's a "deliberate" error and arguably "concealed" which could put penalties at 100% of the tax due. The tax man requiring him to pay his tax would not automatically correct your tax either, you'd have to submit a mistake claim completely separately. HMRC would not see it as the total tax paid as being correct, they'd just see two separate errors (or three, due to missing partnership return).

I've no idea of the sums involved here but it might be worth putting it through a company anyway. Bit of paperwork faff but tax should be less due to no NIC on dividends, and if this is your only earned income then you can get paid £5,824 in salary so you don't actually pay NIC but it counts as if you did for state benefit entitlement purposes. If sums are big enough the tax saving might pay for getting an accountant to do all the paperwork hassle.

POPPYOSCAR

Archi_Bald wrote: »

If anyone is wrong here, it is you. As - in contrast to you - we have read what the OP posted and we responded to the query.

No it is you that is wrong booksurr is correct.


Op has stated she is a property developer and you do not pay CGT
on business profit, you pay income tax.

POPPYOSCAR

drummer_666 wrote: »

thank you for your help

I think in that case I'll just put the property in my name with a DOT as then there will be no partnership tax return which is a bit of a faff. and it's the same outcome tax-wise. So long as it's same for NI as well

I'm a 'she' btw

Would it not be worth a few hundred pounds to get an accountant to do this for you?


We operate a partnership, the accountant completes all the necessary forms and we just sign them, no faff involved.