Q Partnership and Premises
Can you advise how we set up a partnership for a craft workshop business where the workshop is within the home grounds of one partner. Do we separate the capital investment of converting the outbuilding from the actual business and how does this impact the partnership when one partner stands to gain from the improvement to their home?
There are a number of structures that could be used. However, the following is perhaps the simplest and most logical approach:
The owner of the property would grant a lease of the "workshop" to the partners. The lease would state that the partners may, with the consent of the owner (and having all appropriate planning permission in place) make changes to the structure of the workshop. If the owner thought appropriate, this could be stated to be on condition that, at the end of the tenancy, if requested by the owner, the partners at their own cost put the workshop back into the state in which it was acquired. Presumably the lease would provide that the lease terminates on a dissolution of the partnership or retirement from the partnership of the owner partner.
Capital contributions in relation to structural improvements and moveable items would be made in accordance with the partnership agreement. Moveable items paid for by the partners would be removed from the workshop at the end of the tenancy. The cost of undoing the structural changes (if required under the lease) would be borne by the partners in accordance with the partnership agreement. The partners might be able to claim tax relief on some of the capital expenditure. The structural improvements would not attract relief but fittings and other moveable items might attract relief.
It might be sensible to provide in the partnership agreement that if the partnership is dissolved or the owner partner leaves within a certain period after it is formed (5 years?), the owner partner is required to make a contribution to the other partners to allow them to recover their proportion of capital expenditure on the workshop. This would discourage the owner partner from dissolving or leaving the partnership once the structural work had been completed.
As an alternative, the partners could lend the owner partner the money to perform the structural works. By setting the lease at a commercial rate, the owner partner could repay the loan over a period of years. It is worth noting that tax would be payable by the owner partner on the rent paid under the lease and by the partners on any interest paid under the loan.
It is important for the partners (particularly the owner partner) to get legal and tax/accounting advice prior to proceeding with this project. The tax implications for the partners will vary depending on the structure used.