Partnership assets

by **pjclar02** on Wed Jan 25, 2012 2:28 pm

Hello

We have a client who started trading as a husband and wife partnership (50:50 split) say in 1982. They purchased a piece of land for £50,000, the legal title for which remains solely in their two names.

In 1992, they introduced their three children to the partnership. My understanding is that this should have been a chargeable event for CGT purposes, and that therefore the market value of the land (along with any other partnership assets) should have been used to calculate a proportionate disposal to the children? The partnership split became 20:20:20:20:20.

So if the market value of the land in 1992 was, say, £150,000, then mother and father would each have to show disposal proceeds of £45,000 (30% of the property value).

However, the legal title was never transferred to the partnership, or into the names of the children and remains with the mother and father. There is no partnership agreement but the land is shown as an asset in the partnership accounts.

Should this have been a disposal for CGT purposes in these circumstances?
Presumably for inheritance tax purposes, the land remains in the mother and father's estate under the 50:50 split?

Any thoughts welcomed on this one.

Many thanks

by **pawncob** on Wed Jan 25, 2012 9:48 pm

Just because they're partners, it desn't mean they have an interest in partnership assets.
If the land wasn't transferred to them it remains with the parents.

by **pjclar02** on Wed Jan 25, 2012 10:06 pm

Thanks Pawncob. So presuming the fact that the land is shown in the partnership accounts does not in itself make these partnership assets, I assume we can just reverse out the original posting at cost (Cr Fixed assets, Dr Capital account) to clear the land from the partnership accounts?

Many thanks.

by **mullet** on Thu Jan 26, 2012 12:33 am

Yes, that would do the trick. For CG purposes you ignore the partnership and look through it to the beneficial owner(s) of an asset.

by **section 44** on Thu Jan 26, 2012 10:26 am

pjclar02 wrote:So presuming the fact that the land is shown in the partnership accounts does not in itself make these partnership assets

But what more would point towards the property being a partnership asset - assuming, that is, that the partnership is formed in a jurisdiction where partnerships do not have legal personality (e.g. England and Wales rather than Scotland)?

by **pjclar02** on Thu Jan 26, 2012 10:37 am

mullet wrote:Yes, that would do the trick. For CG purposes you ignore the partnership and look through it to the beneficial owner(s) of an asset.

Great, thanks. Presumably then the only way the other partners (the three children) could become beneficial owners of the land would be through a declaration of trust, maybe contained in a partnership agreement (which doesn't exist in this instance!)?

section 44 wrote:
pjclar02 wrote:So presuming the fact that the land is shown in the partnership accounts does not in itself make these partnership assets

But what more would point towards the property being a partnership asset - assuming, that is, that the partnership is formed in a jurisdiction where partnerships do not have legal personality (e.g. England and Wales rather than Scotland)?

I guess this is the crux of the question really. Does the inclusion of the asset in the partnership balance sheet automatically make all partners beneficial owners of that asset, and therefore all liable to CGT. Or, as above, would you have to have a written legal document evidencing the fact that the new partners have become beneficial owners?

The partnership is formed in England.

Many thanks for your input.

by **section 44** on Thu Jan 26, 2012 2:14 pm

If the property is owned (beneficially) by the partners (or some of them) then it doesn't necessarily follow that the property is a partnership asset. Similarly, just because a property may be a partnership asset, it doesn't mean that each partner has a beneficial interest in the property (unum quid).

Let's look at this another way, if the property is not a partnership asset then why is it recognised in the accounts?

by **pawncob** on Thu Jan 26, 2012 6:58 pm

@section44

It's not unusual to have partnership assets shown on the B/S even where those assets are only owned by some of the partners.
Many partnerships have salaried partners with no interest in the partnership assets.

by **section 44** on Fri Jan 27, 2012 12:05 pm

pawncob wrote:Many partnerships have salaried partners with no interest in the partnership assets.

Although some salaried partners aren't partners but are employees.

pawncob wrote:It's not unusual to have partnership assets shown on the B/S even where those assets are only owned by some of the partners.

I don't see that this prevents it from being a partnership asset for a partnership where partners have different capital shares.

by **pjclar02** on Fri Jan 27, 2012 1:21 pm

So presumably, in order to determine whether the children are beneficial owners for CGT purposes we need to assess the facts by reference to the criteria outlined here: http://www.hmrc.gov.uk/manuals/cgmanual/cg70230.htm ?

So, the mother and father financed the acquisition of the land, they hold the legal title, and will be entitled to the full sale proceeds. None of the partners occupy the land, and no rent is charged to the partnership.

Therefore, the only fact that points toward the other partners being beneficial owners is that the land is used within the partnership to derive income, the profit from which is split 20:20:20:20:20 between the five partners.

The conclusion seems to be that this is a grey area, and HMRC may try to claim that the children are beneficial owners and we need to prepare ourselves for that?