Farm Partnerships – Practice Notes
A series of eight practice notes for Practical Law written by
Jonathan Stephens, Partner
t: 01722 412 412
e: [email protected]
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Farm partnerships: tax
• Resource type: Practice note
• Status: Maintained
• Jurisdiction: England
Farm partnerships: tax is part of a collection of eight practice notes on farm partnerships.
The seventh in the series, the note provides guidance on tax planning for farm partnerships, detailing the
most common tax liabilities and how these are calculated.
Jonathan Stephens, Wilsons Solicitors and Practical Law Agriculture & Rural Land
Contents
• Scope of this note
• Tax concepts and the problems of providing tax advice
• Tax planning: farm partnerships
• General anti-abuse rule (GAAR)
• Effect of tax concepts on tax advisors
• Land as partnership property: IHT
• Creation of single business
• Obtaining higher rates of APR
• Farmhouse
• Gifts with reservation of benefit
• Loss of BPR on shares held through partnership
• BPR on trust assets subject to a life interest
• Land as partnership property: CGT
• How to ascertain partners’ interests in partnership assets
• Transfers between partners: Statement of Practice D12
• CGT treatment of transfers of partnership interests
• Holdover elections
• Enterprise Investment Scheme
• Companies' activities via partnerships not "trading" for Entrepreneurs Relief purposes
• Restriction on associated disposals for Entrepreneurs' Relief where a partnership contains "partnership
purchase arrangements"
• Land as partnership property: SDLT
• Land brought into partnership
• Extracting land from a partnership
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• Transfers between partners: property investment partnerships
• Anti-avoidance rules
• Transfer of property subject to charge
• Partnerships holding stock or marketable securities
• Pre-owned assets tax
• Mixed Partnerships
• Annual investment allowance
• Reallocation of profits
• Loans to participators
• Disguised remuneration
• Companies' activities via partnerships not "trading" for Entrepreneurs' Relief purposes
• ATED and related CGT and SDLT
Scope of this note
This practice note is part of a collection of practice notes on farm partnerships. This note provides guidance
on tax planning for farm partnerships, detailing the most common tax liabilities and how these are calculated.
For further information on farm partnerships, see Practice notes:
• Farm partnerships: basic principles ( www.practicallaw.com/5-614-4486) .
• Farm partnerships: who owns the business and assets? ( www.practicallaw.com/8-614-4507) .
• Farm partnerships: dissolution and winding up: retirement and death ( www.practicallaw.com/0-614-4525) .
• Farm partnerships: how land can be owned and occupied in a partnership
situation ( www.practicallaw.com/8-614-4526) .
• Farm partnerships: running the partnership ( www.practicallaw.com/6-614-4527) .
• Farm partnerships: borrowings in farm partnerships ( www.practicallaw.com/8-614-4531) .
• Farm partnerships: limited partnerships and LLPs ( www.practicallaw.com/4-614-4533) .
Tax concepts and the problems of providing tax advice
Given the value of the assets held in farming partnerships, a great deal of care must be given to ensure that
the structure is appropriate and up-to-date.
To understand the tax planning surrounding farm partnerships, it is important to keep in mind the completely
different approaches taken by the various capital and stamp taxes (taking a very broad view).
Tax planning: farm partnerships
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Tax
How tax applies
Inheritance
IHT looks at the loss in value to the transferor’s estate (or the overall value on a death). It
tax ( www.practicallaw.com/3-382
considers open market value, not book value. (For more information, see Practice notes,
-5648) (IHT)
Inheritance tax: overview ( www.practicallaw.com/3-383-5652) and Deceased's estate:
how to value assets and liabilities of the estate for inheritance tax purposes: overview:
Basis for valuing the deceased's estate ( www.practicallaw.com/3-383-6784) ).
IHT: agricultural property
APR looks at agricultural property and applies relief (currently) at 100% or 50% of the
relief ( www.practicallaw.com/0-
agricultural value.
383-5823) (APR)
APR requires occupation of the property for two years (or ownership for seven years).
APR applies automatically and therefore applies before business property
relief ( www.practicallaw.com/2-383-4498) (BPR). In practice, the IHT rules look at each
asset within a partnership to determine APR applies to it. BPR is then applied but not to
any value reduced by APR.
(For more information, see Practice note, Inheritance tax: agricultural property relief:
overview ( www.practicallaw.com/9-383-4485) .)
IHT: BPR
BPR looks at the net value of an interest in a business as a whole and applies relief
(currently at 100% or 50%). It does not apply to excepted assets.
BPR requires ownership of the land for two years.
(For more information, see Practice note, Inheritance tax: business property relief:
overview ( www.practicallaw.com/7-579-8565) .)
Capital gains
The CGT rules look through a partnership and treat each partner individually. Therefore,
tax ( www.practicallaw.com/8-107
any disposal of a partnership asset is analysed through as a disposal by the individual
-5849) (CGT)
partners.
The statutory rules do not adequately deal with transactions between partners and this is
covered by Statement of Practice D12 (revaluation of assets in the accounts being a
trigger point) (see HMRC: Statement of Practice: D12).
(For more information, see Practice note, Partnerships: tax: Capital gains
tax ( www.practicallaw.com/2-203-2362) .)
Stamp duty land
(With the exception of property investment partnerships, this note concerns primarily
tax ( www.practicallaw.com/2-107
partners transferring land interests into partnership and transferring them out of a
-7304) (SDLT)
partnership.)
Broadly speaking, SDLT applies where unconnected persons or companies are involved
in a transaction (subject to anti-avoidance rules).
The interests of a partner in the chargeable assets are ascertained (counter-intuitively) by
reference to income profit sharing ratios rather than capital profit sharing ratios.
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Annual tax on enveloped
ATED applies an annual charge on residential property held by a non-natural person
dwellings ( www.practicallaw.co
(including a partnership with at least one company member).
m/3-564-6965) (ATED)
(For more information, see Practice note, Annual tax on enveloped dwellings
(ATED) ( www.practicallaw.com/5-531-6879) .)
Pre-owned assets
POAT applies an annual income tax charge on a person who gave away property but
tax ( www.practicallaw.com/9-508
subsequently derives a benefit from it (except where this is caught as a reservation of
-7965) (POAT)
benefit for IHT purposes).
(For more information, see Inheritance tax: overview: Pre-owned
assets ( www.practicallaw.com/3-383-5652) .)
Any tax considerations for partnerships must cover all of the points above as well as the other relevant taxes,
including:
• Income tax ( www.practicallaw.com/4-382-5643) and National Insurance
contributions ( www.practicallaw.com/8-201-8297) (NICs).
• Corporation tax ( www.practicallaw.com/1-107-5999) (where a company is involved).
• Value added tax ( www.practicallaw.com/5-107-7468) (VAT).
General anti-abuse rule (GAAR)
It is important to consider, in every situation, the potential impact of anti-avoidance legislation and in particular
the general anti-abuse rule ( www.practicallaw.com/0-521-5298) (GAAR). In essence, a taxpayer can only
mitigate tax if HMRC accept the approach adopted or it is a reasonable thing to do.
Advice must be qualified carefully to ensure that clients understand the impact of the GAAR.
(For more information, see Practice note, General anti-abuse rule (GAAR) ( www.practicallaw.com/4-5270508) .)
Effect of tax concepts on tax advisors
The charges to tax, the reliefs available and the impact of anti-avoidance rules are very complicated. A tax
advisor must often deal with layers of rules built up over many years, and legislation with an uncertain
meaning or that is so wide it catches situations that were never envisaged when drafted.
A client’s advisors must understand who is responsible for the tax advice (or the different areas of tax advice)
and this must be spelled out in the engagement letters.
Land as partnership property: IHT
One of the main reasons for holding land as partnership property (and to regulate it through land capital
accounts) is to obtain the optimum structure for IHT purposes.
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Detailed IHT considerations are far beyond the scope of this note. However, some of the important matters
with a bearing on farm partnerships are set out below. Reservation of benefit is a particular issue (see
Practice note, Inheritance tax: overview: Gifts with reservation of benefit ( www.practicallaw.com/3-3835652) ).
APR and BPR are the two main valuation reliefs to consider (see Practice notes, Inheritance tax: agricultural
property relief: overview ( www.practicallaw.com/9-383-4485) and Inheritance tax: business property relief:
overview ( www.practicallaw.com/7-579-8565) ). Both of these can reduce the value of assets for IHT
purposes by 50% or 100% (at current rates) depending on the circumstances.
Creation of single business
Under the IHT rules, APR is applied to an asset before BPR and it applies only to the agricultural value of
agricultural property. Therefore, on the face of it, APR does not apply to any development value attaching to
farmland or to assets used for non-agricultural purposes (such as, let cottages or converted buildings).
To obtain IHT relief on these other assets, it is possible to include them in a single business with the farming
elements so that BPR can apply. This applies to an interest in a business and the purpose of introducing all
the assets into a partnership is to include them in a single business.
When a partner introduces land so that it becomes an asset of the partnership, he ceases to own it directly.
Instead, he owns an interest in a business representing the value of that land. The key is to ensure that the
trading activities outweigh the investment (non-trading) elements. If the business is wholly or mainly involved
in holding investments, BPR is lost on all of it. It is an all or nothing test. For more information on the wholly or
mainly test and relevant caselaw, see Practice note, Will a farmer's business lose business property relief
under the investment exception? ( www.practicallaw.com/0-612-6705) .
BPR does not apply to excepted assets. These are assets that are not wholly or mainly required for the
purpose of the business or for future use in the business. Particular problems can arise for surplus cash
reserves, unless there is evidence of a clear proposed use.
To provide evidence of a single business including trading and non-trading assets, it is important to ensure
that the accounts include all the relevant income and expenses, and that the appropriate assets are shown on
the balance sheet. Review the situation regularly (see Practice note, Will a farmer's business lose business
property relief under the investment exception?: Assessing the likelihood of BPR
loss ( www.practicallaw.com/0-612-6705) ).
The partnership agreement should also reflect the activities included in the business. For example, the
partnership business should include reference to farming and any other diversified activities, for example:
• Estate management.
• Commercial woodlands.
• Equestrian yards.
• Fishing lakes.
• Weddings and events.
The partnership minutes and records should also evidence the wider activities.
Obtaining higher rates of APR
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Currently, APR is available at 100% on qualifying property provided the transferor has vacant possession (or
the ability to obtain it within 12 months, which can be extended to 24 months for land subject to a tenancy
under Extra Statutory Concession (ESC) F17).
Where land is occupied by, or held in, a partnership, the ability to obtain vacant possession depends on the
strict legal analysis. To put this beyond doubt, many commentators advise that a specific right to extract the
land within 12 months should be written into the partnership agreement.
There are cases where it is not commercially acceptable for a partner to be able to withdraw land within 12
months. In those situations, it may be possible to secure the higher rate of APR by granting a farm business
tenancy (FBT) to the partnership.
Farmhouse
The availability of APR on the farmhouse is often of considerable importance. BPR is not usually available as
the element of residential use disqualifies it. It is necessary to take great care to establish that the APR
conditions are met. Generally, the full value of the farmhouse does not qualify for APR as HMRC take the
view that the agricultural value (on which APR is available) is less than the market value. A discount of 30% is
often applied so that 70% of the value obtains the benefit of the relief.
(For more information, see Practice note, Inheritance tax: agricultural property relief: the
farmhouse ( www.practicallaw.com/8-383-4400) .)
An exemption for farmhouses also exists for the ATED, although the relief must be claimed (see ATED and
related charges and Practice note, Annual tax on enveloped dwellings (ATED): Reliefs:
Farmhouses ( www.practicallaw.com/5-531-6879) ).
Gifts with reservation of benefit
Gifts of partnership interests or of land farmed by a partnership cause particular difficulty for the reservation of
benefit rules (see Practice note, Inheritance tax: overview: Gifts with reservation of
benefit ( www.practicallaw.com/3-383-5652) ). This is because, in the farming context, it is quite usual for the
older generation gradually to pass over farming interests to the younger generation whilst continuing to live on
the farm and to draw income.
The rules under section 102 of the Finance Act 1986 (FA 1986) apply to gifts made after 17 March 1986.
Where a donor makes a gift, but receives any benefit back from it (in the seven-year period before his death,
or the period from the date of the gift to the date of death if shorter), the value of that gift is added back to his
estate for IHT purposes. If the benefit subsequently ceases, he is treated as making a further gift that can
qualify as a potentially exempt transfer. Therefore, if the donor survives for a further seven years after ceasing
to receive a benefit, the property will fall out of his estate for IHT purposes.
Section 102 applies where:
• Possession and enjoyment of the property is not bona fide assumed by the donee at or before the
beginning of the relevant period.
• At any time in the relevant period, the property is not enjoyed to the entire exclusion, or virtually the entire
exclusion, of the donor and of any benefit to him by contract or otherwise.
The dangers of falling foul of the reservation of benefit rule cannot be overemphasised. If a donor is treated as
taking a benefit from an asset given away, it can revert to his estate (for IHT purposes) many years later.
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HMRC practice: reservation of benefit
A reservation of benefit does not arise if the donor gives full consideration for the use of the property given
(HMRC: Inheritance Tax Manual (IHTM):14341).
For example, a father and son are in partnership sharing profits equally, farming land owned by the father and
occupied rent-free. The father gives the land to the son and the profit sharing ratio is adjusted in favour of the
son.
HMRC indicate that there is no reservation if there is an appropriate upward adjustment (in lieu of rent) in the
son's share of profits. What is appropriate is determined by what might be agreed under an arms length deal
between unconnected persons.
Correspondence between CLA and HMRC: 1986
HMRC practice reflects the published correspondence between the Inland Revenue (as it then was) and the
Country Land and Business Association (CLA) in December 1986. The CLA put forward the example of a
farmer taking his son into partnership, where the partnership holds the land. The son has a one-third share in
the income and capital and the father has a two-third share.
The Inland Revenue, at that time, indicated that if the partners share the profits and losses in the same
proportion as they own the partnership assets, the father would not be regarded as making a gift with
reservation.
In summary, where partnership interests are transferred between the family, or interests in the land are
transferred, it is vital that arm's length commercial terms are determined and maintained.
A particular difficulty arises where the older generation are gradually less and less involved in the farming
activities. It is important that their remuneration and benefits are reviewed from time to time to ensure that
they reduce in line with their contribution to the partnership.
The fact that the donor may continue to be a joint owner and occupy the land does not automatically trigger
the reservation of benefit rules. This was confirmed during the passage through Parliament of the Finance Bill
1986, and is known as the "Hansard Concession".
Changes to reservation of benefit rules: 1999 and 2005
The reservation of benefit rules affecting land were significantly changed in 1999 as a result of legislative
changes that attempted to prevent schemes that allowed donors to give away interests in their residential
property.
As these were not wholly successful in preventing the schemes, the government introduced POAT with effect
from 6 April 2005. Broadly speaking, this imposed an income tax charge to a donor who remained in
occupation of the land given away, unless it was caught by the reservation of benefit rules for IHT (see
Practice note, Inheritance tax: overview: Pre-owned assets ( www.practicallaw.com/3-383-5652) ).
Special exclusions for gifts of undivided shares in land
Section 102B of the FA 1986 introduced new rules relating to gifts of undivided shares of land made after 8
March 1999 (such as, a gift of a share of less than 100% in a parcel of land). Section 102B contains a series
of exclusions from the reservation of benefit rules. These rules are vitally important in the context of farming
partnerships and IHT, but also because (where the exclusions apply) POAT is also disapplied.
The rules in section 102B provide that a reservation of benefit does not arise in a series of particular
circumstances in relation to undivided shares, where:
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• The donor does not occupy the gifted land.
• The land is occupied by both the donor and the donee. There is no reservation of benefit provided the
donor does not receive any benefit (other than a negligible one) that is provided by the donee for some
reason connected with the gift. In practice, this is a very important exemption where, for example, the older
and younger generation both occupy the same house. Take care if circumstances change and one or the
other ceases to occupy the house.
• The land is occupied by the donor (but not the donee). There is no reservation where the donor pays full
consideration (for example, a full rent) to the donee for the donee's share of the land.
Loss of BPR on shares held through partnership
There is a potential tripwire where shares in a trading company are held via a partnership or limited liability
partnership ( www.practicallaw.com/2-107-6762) (LLP). HMRC have confirmed their view that partnerships
are essentially non-transparent for IHT purposes, so BPR is not normally available on these shares held
through a partnership (whereas they might be in the hands of the individual partners). BPR might be available
where a trading partnership owns a service company that undertakes part of its business activity. (For more
information, see Legal update, HMRC clarifies BPR treatment of partnership/LLP interests and surplus cash
holdings ( www.practicallaw.com/6-554-6846) .).
BPR on trust assets subject to a life interest
HMRC have a particular view of BPR applying to assets held in trust and used for business purposes by the
life tenant.
Following the decision in Finch v IRC [1984] 3 WLR 212, they consider that such assets cannot be
partnership assets and hence part of an “interest in a business” to which section 105(1)(a) of the Inheritance
Tax Act 1984 applies, obtaining the higher rate of relief. Instead, they can only obtain BPR under section 105
(1)(d), and hence the lower rate of relief.
Land as partnership property: CGT
Broadly speaking, the CGT rules look through a partnership and treat each partner individually and any
partnership dealings are treated as dealings by the partners and not the firm (section 59(1)(b), Taxation of
Chargeable Gains Act 1992 (TCGA 1992)).
How to ascertain partners’ interests in partnership assets
Partners are treated as owning fractional interests in each of the assets of the partnership and a disposal
occurs when a partner’s fractional interest in an asset is reduced (HMRC: Capital Gains Manual (CGM):
27150).
CGM 27220 shows HMRC’s approach as to how a fractional interest in a partnership asset should be
determined, as follows:
• Any specific agreement which sets out how capital assets are to be allocated or if there is no such
agreement,
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• Any agreement or other evidence which sets out how capital profits are to be shared or if there is no such
agreement or evidence,
• Any agreement or other evidence which sets out how income profits are to be shared or if there is no such
agreement or evidence,
• Section 24(1) of the Partnership Act 1890, which provides that assets should be treated as held by the
partners in equal proportions (see BIM72505).
Transfers between partners: Statement of Practice D12
The statutory rules do not adequately deal with transactions between partners and this is covered by
Statement of Practice (SP) D12, originally issued in 1975 (HMRC: Statement of Practice: D12 (SP D12)). SP
D12 refers to shares in asset surpluses, so it is vital to keep a clear eye on capital profits and losses.
SP D12 indicates that chargeable gains can be triggered if assets are revalued on the balance sheet and
there is a subsequent variation in a partner’s asset surplus share. However, in effect, a charge can arise on a
pure balance sheet gain. This would indicate that assets can be brought in at current value (that is, more than
base cost) but that potential issues arise if they are revalued once they are on the balance sheet. A more
cautious view is that chargeable assets should be brought into a land capital account at base cost.
It is helpful to record in the partnership documents the background of the book values for the landed assets.
CGT treatment of transfers of partnership interests
The consideration for a disposal is market value where an asset is acquired or disposed of:
• Other than by a bargain at arm’s length.
• For a consideration that cannot be valued.
(Section 17(1), TCGA 1992.)
Therefore, transfers between connected partners are usually deemed to take place at market value.
The following table details the CGT treatment on a transfer of partnership interests:
Type of disposal
Basis of charge
Provision
Disposal between connected parties.
Market value of the share disposed of.
Section 17(1), TCGA 1992
Disposal due to revaluation of asset on the
Value of the asset on the balance sheet
Paragraph 6, SP D12
balance sheet.
(as revalued).
Disposal where consideration passes
Consideration passing (plus any balance
between the partners outside the
sheet gains under paragraph 5).
Paragraph 7, SP D12
accounts.
Other cases.
An amount equal to the disposing partner’s
Paragraph 4, SP D12
base cost (that is, no gain/no loss basis).
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For more information on the tax treatment of dealings in partnership interests, see Practice note, Disposal and
acquisition of partnership interests: tax ( www.practicallaw.com/3-556-6906) .
Holdover elections
Gifts of partnership interests and transfers at undervalue can trigger CGT. Holdover elections are often
available, but take great care to check that this is the case to ensure that the claim is made correctly and on
time, and to check whether a valuation is required.
Make a claim in the form provided by HMRC and annexed to Helpsheet (HS) 295 within four years of the end
of the tax year in which the disposal is made (HMRC: HS295: Self-assessment helpsheet).
There are a number of potential pitfalls, as follows:
• Settlor-interested trusts. Holdover relief is not available to a trust in which the settlor, his spouse or any
dependent child could benefit. These provisions are very widely drawn. (For more information, see
Practice note, Taxation of UK trusts: capital gains tax: Hold-over relief ( www.practicallaw.com/2-5217098) .)
• Transferees going non-resident. Warn clients that a held over gain will be crystallised if the transferee
goes non-resident within six years after the end of the tax year in which the disposal is made. In the
farming context, it is not uncommon for younger family members to work abroad for a period and this could
potentially trigger held over gains.
For more information, see Practice notes:
• Disposal and acquisition of partnership interests: tax: Entrepreneurs' relief, rollover relief and hold-over
relief ( www.practicallaw.com/3-556-6906) .
• Tax on chargeable gains: general principles: Gifts of business assets ( www.practicallaw.com/1-2057008) .
Enterprise Investment Scheme
There is an exception to the transparency (for CGT purposes) of partnerships in the case of Enterprise
Investment Schemes ( www.practicallaw.com/9-107-6532) (EIS) investments.
A partnership cannot make an EIS investment (section 157 of the Income Tax Act 2007 (ITA 2007) and
HMRC: VCM10520). For example, if it is intended to use EIS rollover for gains made in the partnership, the
funds must be extracted from the partnership and invested by the individual partners.
For more information on the EIS, see Practice note, Enterprise Investment Scheme
(EIS) ( www.practicallaw.com/2-375-9154) .
Companies' activities via partnerships not "trading" for Entrepreneurs Relief purposes
The ability to claim Entrepreneurs Relief on the shares in a company operating through a trading partnership
was restricted by the Finance Act 2015.
Restriction on associated disposals for Entrepreneurs' Relief where a partnership
contains "partnership purchase arrangements"
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Following the Finance Act 2015, the existence of an option or accruer in a partnership agreement may
prejudice an associated disposal for Entrepreneurs' Relief in the context of a family farming partnership, as it
would probably amount to a "partnership purchase arrangement" between connected persons under section
169K(6) of the Taxation of Chargeable Gains Act 1992.
Land as partnership property: SDLT
The SDLT rules affecting partnerships are complex and, to a degree, counter-intuitive. There is an entirely
separate set of rules that apply to partnerships that were introduced to prevent schemes that avoided SDLT
on large commercial developments using partnerships (Schedule 15, Finance Act 2003 (FA 2003)). There are
some complicated and difficult anti-avoidance provisions.
Where a partnership buys or sells land, SDLT operates in the normal way. The specific rules in Schedule 15
to the FA 2003 apply in the following circumstances:
• Where land is brought into a partnership.
• Where land is withdrawn from a partnership.
• On transfers of interests in the partnership (where a property investment partnership is involved).
There are particular anti-avoidance rules that apply in three years of land being brought into a partnership.
These are particularly important to farm partnerships.
When looking at SDLT for partnership transactions, it is necessary to check in detail the rules that apply and
to run the computations.
For more information on SDLT and partnerships in general, see Practice note, SDLT and
partnerships ( www.practicallaw.com/3-107-4913) .
Land brought into partnership
Very broadly, the SDLT charge on land brought into a partnership by a partner is calculated by reference to
the value of the land that is treated as passing to the other partners. The same applies when land is extracted
by a partner. (Paragraph 10, Schedule 15, FA 2003.)
The calculation is by reference to the sum of the lower proportions (SLP). The interests of the partners are
determined by reference to income profits, not the capital entitlements.
How the SLP is calculated means that the SDLT charge does not arise on interests passing to individuals who
are connected to the partner concerned.
The term "connected" is determined under section 1122 of the Corporation Tax Act 2010 (CTA 2010) (as
amended by schedule 15 to the FA 2003).
The term "individuals" does not include companies (except companies acting as trustees).
The question of whether "individuals" can include a body of trustees is not specifically dealt with. Trustees
appear to be treated as a continuing body of persons for SDLT purposes (HMRC: SDLTM31745). The
position seems to be that trustees who are a body of individuals can be treated as an "individual" for this
purpose, although there seems to be no published guidance on this. The legislation provides that a trustee
company can be treated as an individual in certain circumstances.
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The status of trusts varies depending on whether the settlor is still alive. Trustees who are in partnership with
the settlor are connected with him (and others connected with him) during his lifetime, but cease to be
connected on his death. This arises from the wording of section 1122(6)(a) of the CTA 2010, which states that
trustees are connected with "any individual who is a settlor in relation to the settlement" (present tense rather
than past tense). The point is confirmed in relation to CGT in the Capital Gains Manual at CG14590.
A partnership is treated as the same partnership notwithstanding a change of partners, provided that at least
one partner who was a partner before the change remains a partner after the change (paragraph 3, Schedule
15, FA 2003).
There is some doubt about the meaning of "partnership property" for the purpose of SDLT however, HMRC
are likely to want the definition to be as wide as possible.
It seems that if land is partnership property as a matter of partnership law, HMRC stamp taxes will treat it as
such. The uncertainty is whether HMRC deem property held outside the partnership to be charged for SDLT
as if it was partnership property.
The SDLT statutory provision for partnership property is wider than the definition in general law as it seems to
include assets owned by all the partners and used in the business, but held outside the partnership
(paragraph 34, Schedule 15, FA 2003). The clarification in August 2007 included the following:
“In practice whether a chargeable interest is or is not partnership property for SDLT purposes will
be decided in similar manner as whether or not it is partnership property by virtue of section 20 of
the Partnership Act 1890. So a chargeable interest acquired, whether by purchase or otherwise,
on account of the firm, or for the purposes and in the course of the partnership business, will be
partnership property for SDLT purposes.
The mere fact that a business is carried on in property belonging to one or more partners does
not make that partner’s chargeable interest partnership property. Where a chargeable interest is
owned by all the partners then whether it is partnership property will depend upon the basis on
which it is held by the co-owners.”
(Stamp duty land tax (SDLT) Technical News: Issue 5 - August 2007 (now archived).)
Extracting land from a partnership
The same principles apply to extracting land from a partnership as for bringing land in. The computations are
made in broadly the same way. (Paragraph 18, Schedule 15, FA 2003.)
Land introduced to partnership post-October 2003
Take special care where land was introduced to the partnership on or after 20 October 2003. It is necessary
to check that the appropriate stamp duty ( www.practicallaw.com/4-107-7303) or SDLT was paid when it
was introduced. If not, a charge can apply on the way out (paragraph 21, Schedule 15, FA 2003).
Incorporation of all or part of family partnership business
On the incorporation of a family partnership business to a connected company, it is possible that no SDLT
arises on the landed interests transferred. This occurs where all the partners and the shareholders in the new
company are connected individuals (within the meaning of section 1122 of the CTA 2010). It is a chargeable
land transaction, but the computation results in a nil payment of SDLT.
For more information, see Practice note, Incorporating a partnership: tax issues: Stamp duty land
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tax ( www.practicallaw.com/1-558-6905) .
Transfers between partners: property investment partnerships
Where the land is partnership property, transfers of interests between the partners of a trading partnership do
not trigger SDLT. However, changes in income profit sharing ratios of "property investment partnerships"
potentially trigger SDLT as between the partners.
A property investment partnership is a partnership whose sole or main activity is investing or dealing in
interests in UK land, whether or not the activity involves construction activities on the land in question. The
rules are complex and it is important to consider carefully where a farming partnership is involved in these
activities. "Sole or main" is given the same meaning as "wholly or mainly" for BPR purposes (section 105(3),
Inheritance Tax Act 1984 (IHTA 1984)). For more information on the wholly or mainly test, see Practice note,
Will a farmer's business lose business property relief under the investment
exception? ( www.practicallaw.com/0-612-6705) .
Anti-avoidance rules
There are important anti avoidance rules to be considered.
Three-year rule
There can be an SDLT charge if either of the following occur within three years of a transfer of land into a
partnership:
• The transferor (or a connected person) withdraws money or money’s worth from the partnership (other
than income profit including repayment of a loan).
• A person withdraws capital from his capital account, reduces his partnership share or ceases to be a
partner.
(Paragraph 17A, Schedule 15, FA 2003.)
In that event, there is effectively an SDLT charge on the land introduced to the partnership. The other partners
are treated as the purchasers and must file an SDLT return.
On the face of it, these provisions may trigger SDLT where a partner has introduced land in three years
before his retirement or death. However, there must be a withdrawal of money or money’s worth. Therefore it
would seem that the provisions would not apply, for example, if the deceased’s personal representatives
joined the partnership and left his capital in for the remainder of the three-year period. There appears to be
little or no published guidance on this point.
General anti-avoidance rule
Where a series of transactions are entered into in relation to land, HMRC can ignore the intervening steps if
this results in a higher charge to SDLT (section 75A, FA 2003). For example, if steps A, B and C are
undertaken, HMRC can charge SDLT as if step B had not occurred where this results in a higher charge. The
taxpayer must file a return if he considers that section 75A applies.
Profit shares varied under earlier arrangement
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Paragraph 17 of Schedule 15 to the FA 2003 can also apply an SDLT charge where profit shares are varied
under an arrangement made at the time when land is introduced. Separate charging arrangements apply to a
paragraph 17 charge.
Transfer of property subject to charge
Before changes introduced by the Finance Act 2006, the transfer of property subject to charge within
partnerships could have SDLT implications (because the assumption of the debt is chargeable consideration
and the charging provisions for partnerships looked to market value and actual chargeable consideration).
Following the changes in 2006 this is no longer the case. The statutory mechanism for charging SDLT in
partnerships (such as, Schedule 15 to the FA 2003) only takes into account the market value of the property
and not any chargeable consideration provided (such as the assumption of debt).
Partnerships holding stock or marketable securities
Stamp Duty (rather than SDLT) can still apply to a situation where a person buys an interest in a partnership
for value where it owns stock or marketable securities (see Practice note, Disposal and acquisition of
partnership interests: tax: Stamp duty ( www.practicallaw.com/3-556-6906) ).
Pre-owned assets tax
The rules for POAT are found in Schedule 15 to the Finance Act 2004 (FA 2004). These rules apply to land,
chattels and intangible property comprised in a settlement. (For more information, see Practice note,
Inheritance tax: overview: Pre-owned assets ( www.practicallaw.com/3-383-5652) .)
The rules in Schedule 15 to the FA 2004 do not specifically address businesses and farms. Therefore, the
POAT rules must be applied by using the basic principles.
It is suggested that POAT cannot apply to gifts of land where these are held as partnership property. The
reasoning is that, applying general principles, a gift of a partnership share (where land is held as a partnership
asset) is technically a gift of a chose in action, not of an interest in land. (Emma Chamberlain and Chris
Whitehouse, Pre-owned Assets and Estate Planning (Sweet and Maxwell, 3rd ed, 2009).)
Mixed Partnerships
The term "mixed partnerships" is used to mean partnerships where the members include one or more
companies as well as individuals. Some of the rules also affect partnerships between individuals and
settlement trustees.
It is quite common to find farming companies set up in the 1960s that were granted secure tenancies under
the agricultural holdings legislation. Over the years, these are often introduced into mixed partnerships with
the farming members of a family.
Mixed partnerships were also used to allow surplus profits to be rolled up in a corporate partner, where the
corporation tax rate is lower than the marginal income tax rate applicable to individual partners.
In the past, there was concern that a company’s interest in a trading partnership should be regarded as an
investment. HMRC have recently confirmed that a corporate partner, in a trading partnership, is normally
treated as carrying on a trade. This is now specifically excluded for Entrepreneurs' Relief purposes.
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In the last few years there have been some important developments in this area.
Annual investment allowance
The annual investment allowance (AIA) is part of the capital allowances regime. It was introduced in 2008 as
a replacement to first year allowances. A 100% a year AIA is available for qualifying expenditure up to a
maximum annual limit. This limit has been subject to regular changes since the introduction of the AIA in April
2008. The previous annual limit of £500,000 was due to expire on 31 December 2015 and revert to £25,000.
However, following a government announcement in the July 2015 Budget, the AIA limit from 1 January 2016
is instead set at £200,000 (section 8, Finance (No. 2) Act 2015). In the right circumstances, AIA is extremely
important. However, it does not apply to mixed partnerships or to partnerships including settlement trustees.
For more information on the AIA, see Practice note, Capital allowances on property transactions: Annual
investment allowance ( www.practicallaw.com/6-362-6968) .
Reallocation of profits
There are rules in the Finance Act 2014 (FA 2014) to counter excess profit allocation to non-individual
partners. HMRC has power to reallocate profit to individual partners where a non-individual partner’s profit
share exceeds an appropriate notional profit. This is defined as either:
• A return on capital contribution.
• Consideration for services.
These rules were introduced to tackle perceived abuse where surplus profits were rolled up in a corporate
partner.
Conversely, there are rules dealing with tax losses. These rules prevent the allocation of an excessive amount
of losses to individuals (on the basis that they can set off the losses against other income on which they pay a
higher rate of tax than a corporate partner would).
Non-individual partners include companies and settlement trustees.
For more information, see Practice note, Partnerships: allocation of profits and losses: tax: Mixed membership
partnerships: reallocation of profits to individual partners ( www.practicallaw.com/5-572-0049) .
Loans to participators
In a mixed partnership, a corporate partner may have rolled up its profits over the years and the individual
partners extracted surplus cash giving them an overdrawn current account position. Effectively, this is a loan
to the individuals from the company through the partnership.
Following section 79 of, and Schedule 30 to, the Finance Act 2013, these arrangements are now subject to
the loans to participators charge under under which the company must pay corporation tax at 25% on the loan
(section 455, CTA 2010). Under current rules, this is recovered when the loan is repaid. This applies to loans
made on or after 20 March 2013 (and presumably to any increase in existing loans).
For more information, see Practice note, Close companies: tax: Loan to participator tax charge: Trustees and
partnerships ( www.practicallaw.com/9-546-3745) .
Disguised remuneration
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Far-reaching income tax rules for disguised remuneration were introduced by the Finance Act 2011 (FA 2011)
and potentially have application within a mixed partnership. The rules apply, broadly speaking, where any
type of reward or recognition (or a loan) is provided to an employee by someone other than his employer.
The extent of these rules in the context of a mixed partnership is untested, but it would be of concern (for
example) where an individual is a partner in the business and also is (or was, or may become) an employee
of the corporate partner.
Take care where any partner, or anyone linked to a partner, is also an employee of the corporate partner.
Loans from a third party to an employee are a particular problem as they can be fully subject to income tax
even if they are repaid.
For more information on the disguised remuneration rules in general, see Practice note, Disguised
remuneration tax legislation (rewards from third parties, Part 7A of ITEPA 2003): an
overview ( www.practicallaw.com/2-506-7659) .
Companies' activities via partnerships not "trading" for Entrepreneurs' Relief purposes
The general view has always been that a company can carry on a trade via a partnership so that
Entrepreneurs’ Relief was available on the disposal of shares in the company (subject to the other conditions
for the relief being satisfied). However, this rule was changed for Entrepreneurs' Relief purposes by the
Finance Act 2015. This added new wording into section 169S of the Taxation of Chargeable Gains Act 1992
so that any activities carried out by a company as a member of a partnership are treated as not being trading
activities for this purpose (see Practice note, Entrepreneur's relief: Conditions to be met by the company).
ATED and related CGT and SDLT
There are three related charges that arise where residential property is held by a non-natural person. This
includes a partnership with a company member or which is a collective investment scheme. The tax charges
are as follows:
• ATED. This is an annual charge of between £7,000 and £140,000 that arises on residential property (a
single dwelling interest) worth more than £1 million owned by a non-natural person (including a mixed
partnership).
(The threshold was £2 million when introduced until 31 March 2015 and is due to reduce to £500,000 from
1st April 2016.)
(See Practice note, Annual tax on enveloped dwellings (ATED) ( www.practicallaw.com/5-531-6879) .)
• SDLT at a 15% rate. This applies to residential property worth over £500,000 that is acquired by a nonnatural person.
This threshold was £2 million when introduced on 21 March 2012 until 20 March 2014.
(See Practice note, SDLT: 15% rate on enveloping high-value residential
property ( www.practicallaw.com/4-566-9305) .)
• ATED-related CGT. CGT at 28% is charged on the sale by a non-natural person of residential property
worth over £1 million on gains (except where an ATED relief applied throughout). The threshold was £2
million when introduced until 5 April 2015 and is due to reduce to £500,000 from 6 April 2016.
(See Practice note, Capital gains tax charge relating to annual tax on enveloped dwellings
(ATED) ( www.practicallaw.com/3-539-8885) .)
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ATED reliefs include property rental businesses, employee accommodation and farmhouses.
The relief for farmhouses is narrower than for APR. The occupier must have a substantial involvement in the
day to day work on the farm or direction and control of it. The trade must be carried on with a view to profit
and on a commercial basis. Retired farm workers and their spouses also qualify. These reliefs must be
claimed annually. However, there are a few particular issues to be discussed.
Liability
In a mixed partnership, each of the partners is potentially jointly and severally liable for the ATED payments,
not merely the company. This is a particular problem for individuals participating in limited partnerships as it is
common for these partnerships to have a company as general partner and for the individuals to be limited
partners. The statutory liability to ATED overrides the limitation of liability for the individuals concerned.
Collective investment schemes
A CIS is also a non-natural person for the purposes of ATED and the related taxes. It is a creature of the
financial regulation laws and is very widely defined, as follows:
“Any arrangements with respect to property of any description, including money, the purpose or
effect of which is to enable persons taking part in the arrangements (whether by becoming
owners of the property or any part of it or otherwise) to participate in or receive profits or income
arising from the acquisition, holding, management or disposal of the property or sums paid out of
such profits or income.”
(Section 235, Financial Services and Markets Act 2000 (FSMA 2000).)
The CIS does not apply where the persons who participate also have day-to-day control over the
management of the property.
A CIS must also have one or both of the following characteristics:
• The contributions of the participants and the profits or income out of which payments are to be made to
them are pooled.
• The property is managed as a whole by or on behalf of the operator of the scheme.
(Section 235(3), FSMA 2000.)
For circumstances that are not treated as a CIS, see:
• Financial Services and Markets Act 2000 (Collective Investment Schemes) Order (SI 2001/1062).
• Financial Conduct Authority: Perimeter guidance manual (PERG) (this currently seems to offer very little
guidance outside the sphere of marketable securities).
In practice, it can be very difficult to determine what is a CIS and what is not. A closed-ended company cannot
be a CIS although a partnership or LLP can be (paragraph 21(1), Schedule, Financial Services and Markets
Act 2000 (Collective Investment Schemes) Order (SI 2001/1062)).
Although it seems that the CIS rules do not usually apply to farming partnerships, they may apply to
partnerships that are more in the nature of investment vehicles.
In addition to the tax consequences, it is important to remember that it is unlawful to operate or promote a CIS
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unless this is done by a person authorised under FSMA 2000. For this reason, these arrangements are either:
• Structured so that they are operated by an authorised person.
• Operated from an overseas jurisdiction to which FSMA 2000 does not apply.
Resource information
Resource ID: 6-614-4532
Products: Agriculture
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