Tax Return for HMO Partnership Properties

A property is classified as a House in multiple occupation (HMO) if it accommodates three or more individuals from different families who share common facilities such as a bathroom, toilet or kitchen. HMO properties are popular in the UK for providing affordable accommodation to those with limited housing options, including students, migrant workers, and some of society’s most vulnerable people. Property investors run HMOs as a sole trader, via partnerships, or under limited companies. Income from HMO properties must be reported to HMRC using the appropriate tax returns. These returns vary depending on the ownership structure - whether individual, partnership, or limited company. The deadlines for filing these returns also differ accordingly.

Failure to report HMO income or to make the income tax payment on the income may result in significant penalties from HMRC. HMO investors must stay informed about tax return filing deadlines to ensure their tax obligations are up to date. This article explores how the income from HMO partnership properties is reported to HMRC and the various tax reliefs that may be claimed.

Tax on Partnerships and Partners

A partnership is a formal agreement between two or more individuals to jointly manage and operate a business with the goal of generating profit. In a partnership, each partner serves as a representative of the business, and all partners are personally liable for the partnership's debts and obligations. There are several types of partnerships in the UK, including general partnerships, limited liability partnerships. All types of partnerships are required to file the partnership tax return.

Since operating HMOs is not considered trade or profession, the income from such properties is classified as the investment income or income from UK property. The income generated from all properties in the partnership must all be reported in the tax return.

When an HMO letting is run through a partnership, it is not the partnership that is taxed, but the partners. Irrespective of the tax liability, the nominated partner must still file a partnership tax return. Like individual taxpayers, each partnership is assigned a Unique Taxpayer Reference (UTR) from HMRC. The UTR number is included in the partnership tax return as HMRC uses the same number to identify and track the partnership’s tax records.

The share of profit allocated to the partners is again declared and taxed on the individual tax returns of each partner. While filing the partnership tax return, the share of profit each partner is entitled to must be specified. Based on the figures entered in the partnership tax return, each partner’s share is reflected in their personal tax return, and is subsequently taxed at either 20, 40, or 45 percent on the income above the personal allowance.

How to Report HMO Partnership Property Income?

Partnerships declare their income, whether generated from trading, as a property income, or income generated from overseas, on the Self-Assessment 800 form. The SA800 form includes sections to include income and expenses from partnership trading income, partnership business and investment income, etc.

Subsequently, each partner needs to file a SA104F supplementary pages to declare their income from partnership property while filing their SA100 form. The partners of the partnerships with trading income and savings income can submit the SA104S form instead. However, partners of the partnership with property income must submit the SA104F form.

Deadlines and Penalties

The deadline for filing the partnership tax return is the same as the individual tax return of the partners, i.e. 31 January of the following year for digital submissions, and 31 October of the same year for paper returns.

While it is the responsibility of the nominated partner to file the partnership return by the deadline, the failure to meet this deadline results in a £100 penalty for each partner. If the return remains unsubmitted for three months after the deadline, a daily penalty of £10 is charged for each day the return remains unfiled. Additional penalties are charged if the return is not filed within 6 months and 12 months. The penalties can be summarised as follows:

Partnerships that receive the penalties can appeal the penalty. However, HMRC only accepts the appeals brought by the nominated partner of the partnership. HMRC considers these appeals on behalf of all the relevant partners and holds the nominated partner liable to each penalty. If the partners provide reasonable excuse regarding the failure to file the return, the appeal may be successful.

As previously mentioned, partnerships do not pay the income tax; meaning that the partners will be penalised separately for failing to pay the tax on time.

Important Considerations

There are certain factors to be considered while filing the tax return of partnerships, whether it is a property letting partnership or one that is trading. Partnerships are eligible for certain reliefs and deductions that should be utilised to minimise the tax liability of each partner.

Allowable Deductions

While not all expenses incurred by partnerships are deductible for tax purposes, most of them are. Generally, the costs that are not capital in nature, such as improvement costs, acquisition of furniture and fixtures for the HMO property. Other expenses that are incurred ‘wholly and exclusively’ for partnerships are tax deductible. These expenses include direct costs incurred on letting out the HMO, employee costs, repairs, general administrative costs, costs on advertisement, accountancy and professional fees, etc.

In contrast, all non-business expenses are disallowed expenses for tax purposes. Similarly, costs of the goods taken for personal use by the partners are also disallowed expenses and such costs are added to the profit of the partnership.

Finance Costs Restriction

Unlike companies, sole traders and partnerships are subject to the finance cost restriction since 6 April 2017. Since its introduction, landlords and investors operating property rental businesses cannot deduct the mortgage interest paid on the property to compute the tax. With the restriction, the mortgage costs deduction is replaced by the basic rate relief, under which 20% of the interest income is deducted from the income tax liability to arrive at the income tax payable.  

Capital Allowance

One of the more controversial sides of the HMO properties is the Capital Allowance Claim. Many HMO landlords have made attempts at the claim, but HMRC has contended that they will not accept any claim for Annual Investment Allowance (AIA) on HMOs. However, ‘Plant and Machinery Allowance’ can still be claimed, which is available in areas except dwelling houses.

In the context of capital allowances for Houses in Multiple Occupation (HMO) properties, it is crucial to clarify that the term 'common parts' primarily refers to shared areas like a common entrance lobby, corridors, stairs, lifts, and building installations such as mains, gas, electrical services, and security systems. These elements do not provide living facilities and will count outside the ‘dwelling houses.’ The court case [Tevfik v HMRC] holds significance for owners of HMOs, offering clarity on the eligibility of capital allowances. The ruling addresses situations where these allowances can be claimed and where they cannot. The following two cases help us to understand the eligibility for capital allowance in HMOs.

Case I – Mr. A rents out a five-bedroom property to a group of people forming different households. The property has a shared kitchen and several bathrooms that are shared by the occupiers. In this case, capital allowance cannot be claimed on the property because the house as a whole, is a dwelling house, and common parts are within the dwelling.

Case II – Mr. B lets out three one-bedroom studios in an HMO. Each property contains a kitchenette, cooking facilities and a shower area. As these properties provide the facilities required for ‘day-to-day private domestic existence’ within it, claims for plant and machinery allowance in respect of shared parts of houses in multiple occupations (such as hallways, stairs, landing, attics, and basements within the house, are not part of the dwelling house) and are available for allowance.

However, extreme caution should be exercised when claiming capital allowances on HMOs, as HMRC’s guidance CA11520 explicitly clarifies the following:

“We are aware that some taxpayers have submitted claims for plant and machinery allowances in respect of shared parts of houses in multiple occupations (such as hallways, stairs, landings, attics and basements within the houses). They contend that these shared areas are not part of the dwelling-house and that allowances are therefore available. We disagree with this position. If you come across such a claim, please notify the Capital Allowances single point of contact for your area.”

Replacement of Domestic Items

Replacement of domestic asset relief allows landlords, whether sole traders or partnerships, to claim tax relief when the domestic items on HMO property are replaced. Essentially, when a partnership replaces a qualifying domestic item (see below), the expense incurred to acquire that item is considered an allowable expense for tax purposes.

The initial cost incurred when purchasing the domestic item for the first time is not covered by the relief. Additionally, the new item must be provided solely for the use of tenants in the property and the old item should no longer be available for use.The amount of relief can vary depending on factors such as whether the replacement is like-for-like or not.

Conclusion

Managing the tax affairs of HMO partnership properties requires careful attention to detail, particularly when it comes to understanding the specific obligations and potential reliefs available. It is essential for HMO investors to remain compliant with HMRC’s requirements to avoid penalties and to ensure that all allowable deductions and reliefs are claimed to minimize tax liability. Properly reporting income and understanding the complexities of finance costs, capital allowances, and replacement relief are key to successful tax management in this sector.