Partnership Tax Update

In this article on Partnership Tax, we will take a look at some of the latest developments in practical tax matters relating to Partnerships. 

Incorporation of a Business within an LLP

The increased usage of LLPs as business vehicles has raised thoughts over how a business owned by an LLP could be transferred to a company.

Routes for incorporation must be carefully considered and options include transferring the business of the LLP to the company or transfer of the members’ interests to the company.   Generally commentators opinion is that HMRC are indifferent to the structure utilised but the incorporation relief rules regarding CGT must be reviewed thoroughly in the planning phase.

Also solicitors should be consulted to make sure implementation is carried out properly.

Incorporation Relief

Key tests for the relief from capital gains tax include whether a business is being operated and whether the whole business is transferred.

The Tribunal Case of Elizabeth Ramsey looked at whether a property portfolio could be a business.  The Tribunal Judges held that in her case, it wasn’t a business, but there is some doubt as to whether this decision was appropriate.  It isn’t binding given that it was a Tribunal case.

SDLT on Incorporation

It is thought that there could be an interpretation of the current rules where SDLT is avoided on the transfer of a property as part of a business from a partnership to a limited company.  Such an interpretation may be in contravention to HMRC’s view and specific written advice should be obtained.

Certainly conversation to a partnership business from a sole trader and then incorporation could be caught by anti-avoidance rules.

Corporate Partner

Consideration of the introduction of a company into a  partnership of natural persons is still a consideration in terms of allowing a structure that works commercially for a business.

If commercial reasons dictate that a company would be a useful partner then tax savings might be achieved, especially as we are still to have a highest rate of income tax of 45% + 2% NI.

It is important to note that the introduction of a company needs bespoke consideration and could cause difficulties  in terms of partnership succession, unless a careful plan is set out.  There are a number of different options under which a company could interact with a partnership.

Orsman v HMRC – Consideration for SDLT

The case of Orsman v HM Revenue and Customs (TC01921) highlights that care should be taken when attributing sale proceeds between land and ‘chattels’ such as fixtures and fittings.

In this case the taxpayer sold a property for £258,000 of which £8,000 was attributed to chattels and was not therefore included in the sale price for SDLT purposes.

The sale agreement contained a list of fixtures and fittings to which the £8,000 consideration related and this included (amongst other items) fitted units in the garage.

For SDLT purposes the value of fixtures and fittings that are ‘part of the land’ should be included in the sale proceeds for SDLT.

The rate of SDLT is 1% where the sale proceeds are between £125,000 and £250,000, rising to 3% where the proceeds are in excess of £250,000 but less than £500,000.

Therefore if some of the proceeds attributed to chattels were in fact attributable to the land then the rate of SDLT would increase from 1% to 3%.

In determining whether a chattel is part of the land the following two tests should be considered:

1. the degree of annexation of an item to the land (ie is furniture fixed to the wall, what damage would be caused by removing the item?)

2. what is the purpose of the annexation (for example, was the item put in place in order to better enjoy the land or the item?)

In this case the tribunal found that the fitted garage units were provided in order to increase enjoyment of the garage by creating a work space.  Thus the value of the units (agreed to be £800) should have been included in the sale proceeds for SDLT purposes.