Partnerships ― inheritance tax

By Tolley
OMB_tax_img8

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Partnerships ― inheritance tax
  • Transfer of partnership interest to a connected person
  • Transfer of partnership assets
  • Business property and agricultural property relief
  • Withdrawal of relief

This note explains the general rules surrounding the inheritance tax (IHT) implications of being a partner in an English general partnership. Different rules may apply to Scottish partnerships, see Simon's Taxes I6.202 (subscription sensitive).

As a partnership is transparent for tax purposes, the inheritance tax rules are applied to each partner in accordance with their individual circumstances and their interest in the partnership and its assets.

PM60405

For further guidance on what constitutes a partnership, see the Is there a partnership? guidance note.

Transfer of partnership interest to a connected person

The definition of a connected person is in TCGA 1992, s 286 as applied by IHTA 1984, s 270.

The transfer of an individual’s share in a partnership to a connected person is not treated as a transfer of value for IHT purposes, provided there is no gratuitous benefit passed and the transaction is one which would have been undertaken at arm’s length between unconnected persons. The same is true of a change in the partnership sharing ratio.

IHTA 1984, s 10; PM60420

It is therefore necessary to consider whether the transfer would have taken place on the same terms if the individuals had been completely unconnected. In considering whether this requirement is satisfied, HMRC will consider all available evidence, including:

  • whether the parties were separately advised, and
  • whether negotiations show a sequence of offer and counter offer

They also say that if there is a history of dealings between two persons as a result of which one regularly had the better of the bargain, then there may be grounds for concluding that the parties were not genuinely at arm’s length.

IHTM04164

The transfer of an individual’s share to a connected person will