Chris Thorpe looks at some of the tax planning opportunities available with partnerships.
A partnership is defined within the Partnership Act 1890 (at section 1(1)) as the coming together of one or more individuals with a view to make a profit.
Partnerships are transparent for tax purposes (i.e., the partners hold the underlying assets) and are subject to income tax on their individual profit shares. Likewise, for capital gains tax (CGT) and inheritance tax (IHT) purposes, the partnership itself is ‘looked through’ with partners taxable on capital gains and transfers of value respectively.
A partnership agreement is usually drawn up as a constitution, to establish profit shares and the understandings between the partners, which will override the presumptions contained within PA 1890 (one of which is that the partnership dissolves when a partner dies).
The flexibility and transparency of partnerships can have its uses.
Income splitting
Partnership assets can be passed between partners with a view to succession planning, but the previous owners can potentially still retain their partnership income. Income profit shares do not have to follow capital shares within a partnership, as HMRC make clear in their guidance (see HMRC’s Partnership manual at PM137000).
However, care needs to be taken with both the ‘gifts with reservation of benefit’ rules for IHT purposes and the ‘settlements’ legislation (involving spouse and/or minor unmarried children) for income tax purposes. If the original partner gifts too much capital to the other partners, yet they are still able to benefit as before, that partner could potentially be assessed to income tax and/or IHT on their original holdings.
The car conundrum
With a ‘company’ car (i.e., one owned by a limited company) used even by a managing director, availability for private use will attract benefit-in-kind income tax and Class 1A National Insurance contributions (NICs) charges.
By contrast, if a partner uses a car owned by the partnership, no such charges arise. Instead, there are private use restrictions on the capital allowances and any allowable costs. It might be tempting to set up a partnership alongside a limited company to hold the cars and allow use by the directors to avoid the income tax and NICs charges.
Sadly, however, HMRC have thought of that; the partnerships would likely be regarded as an extension of the company with the cars’ availability being by virtue of their connection with the company. The courts would seem to agree Southern Aerial Communications Ltd and Mr & Mrs Jones v HMRC [2015] UKFTT TC04692; and Cooper & Others v Revenue & Customs [2012] UKFTT 439.
Unless the partnership is genuinely independent of the company and has some business with third parties, it is unlikely that such a tactic would succeed.
Stamp duty land tax
When land/buildings are transferred to a connected company (e.g., incorporations), stamp duty land tax (SDLT) will be charged on the market value of that property (FA 2003, s 53; separate legislation applies in Scotland and Wales).
However, if a partnership does the same, FA 2003, Sch 15 states that, provided the ownership stays the same and/or the partners are related, the taxable value of the transfer will be nil. However, it is likely that HMRC would contest the position unless the partnership were genuine and not established purely to exploit this provision.
Limited liability partnerships
Despite their being body corporates, don’t forget that limited liability partnerships (LLPs) are the same as general partnerships as far as income tax/CGT is concerned, except there is the benefit of limited liability.
LLPs offer the best of both worlds with partnerships’ transparency and flexibility, but also with the protection of a limited company.
Practical tip
Drawing up a partnership agreement is the most important practical tip to ensure everyone understands how the business is to be run (and the 1890 Act presumptions are overridden, if desired). The role of partnerships in facilitating succession and tax planning should be considered, but the tax tail must not wag the commercial dog and wider business considerations surrounding partnerships must also be made.
