UK Can a partnership have a general reserve? And buy property with it?

[ob1consulting]

Hello everyone

my wife and I own a partnership that accrues income from IT consultancy and property rental.

(The partnership has no specific agreement and so, as I understand, is governed by 1890 partnership act).

We propose not to take all of the partnership income as personal taxed income (salary or distributed profit), i.e. to allocate a proportion of the net profit to 'general reserve'. For example this might at some future point be used for rental property repairs or IT equipment.

My first question is simply 'is it permitted to allocate a proportion of net profit to general reserve'?

Secondly, if this general reserve accumulates over time, the partnership may agree to invest it in e.g. a further rental property, to be owned by the partnership for its business.
This is my second question: 'would it be permitted to use a general reserve for property investment?' The advantage being that it would be pre-tax income used for this investment, rather than post-tax income.

Thank-you for your time

 

[Becky]

Welcome to the forum!

As a partner, you are taxed on profits arising - it doesn't matter whether you want to invest those profits elsewhere or keep them in a reserve, you won't avoid the tax charge on that portion. So if you motivation is tax-related then it may be best to consider another structure - such as limited company. Companies are subject to corporation tax on their taxable profits (currently 20% for small companies) and shareholders are subject to income tax on dividends withdrawn - so if you keep the profits in the company you would not suffer income tax on them.

If you are thinking of changing your business model I would strongly recommend speaking to a tax adviser.

 

[ob1consulting]

Dear Becky,

thank-you very much for your thoughts on about the 'general reserve' - that prompted me to go looking for confirmation of that perspective (that such a 'reserve' would not be admissible, for a partnership), which of course was easy to find. I'll prepare our accounts accordingly.

An aspect of my second question remains unanswered, namely if the partnership chose to invest their income during the same tax year, would the tax on the income be avoided? This is really only an academic question for me!

A simple example: a partnership ABC has business in IT consultancy and property rental. In one particular year they make £50K income from IT consultancy, and choose to expend this £50K on a second property (deposit), to be used for rental purposes (by the partnership). Net Profit is zero so no tax is paid: correct?

 

[Becky]

Capital expenditure does not attract tax relief in the same way as revenue expenditure I'm afraid. Capital allowances are available for certain things, but relief is spread over a number of years and as far as I am aware residential buildings do not qualify.

This general guidance might be useful to you: HM Revenue & Customs: Tax allowances and reliefs if you're self-employed