Family Limited Partnerships – The ‘Business’ Test

Matthew Hutton MA, CTA (fellow), AIIT, TEP highlights HMRC's current thinking on what constitutes a 'business' for tax purposes.

Context

Previous items in Monthly Tax Review have explored the possibilities of using a partnership as an alternative to a trusts structure, given the limitations imposed by FA 2006.

An article by Marc Selby in Tax Advisor explores the requirement that, to constitute a partnership at all, the partners must carry on a business with a view to profit. The article starts by reviewing a number of decided cases where the Courts have tended to give the concept of ‘business’ a wide meaning (with some exceptions), though tending to consider companies rather than partnerships. 

For example, where a company incorporated for the purpose of making profits puts its assets to gain full use, that prima facie amounts to carrying on a business (per Lord Diplock in American Leaf Blending Co v Director General of Inland Revenue [1978] STC 561). The Special Commissioner, applying those dicta, held that a company which had made a loan to its subsidiary and received modest amounts of interest and rent was carrying on a business and should therefore count as an associated company for small companies' relief purposes (Land Management v Fox [2002] STC (SCD) 152).

HMRC’s View

If ‘business’ has been given a wide meaning in tax cases, it has been construed comparatively narrowly by HMRC in applying the ‘business’ test to non-trading partnerships. Paragraph PIM 1030 of HMRC’s Property Income Manual says:

'A partnership is unlikely to exist where the taxpayer is one of a group of joint owners who merely let a property that they jointly own. On the other hand, there could be a partnership where the taxpayer is one of a group of joint owners who let the jointly owned property; and provide significant additional services in return for payment.

Much depends on the amount of business activity involved. The existence of a partnership depends on an organisation similar to that required in an ordinary commercial business.’

Critical Comment and Practical Advice

It is submitted that HMRC apply the ‘business’ test too narrowly in relation to ordinary and limited partnerships. Following the exchange of correspondence with the ClOT referred to above, HMRC now appear to apply a presumption in favour of the test being satisfied where the LLP is holding a portfolio of investments or letting one or more properties on a commercial basis. There is no reason why the same presumption should not apply in respect of ordinary or limited partnerships carrying on an investment activity, particularly where the relationship between the family members is governed by a formal partnership agreement.

HMRC’s recent confirmation regarding the application of the ‘business’ test to LLPs is welcome. However, uncertainty continues concerning HMRC’s application of the test to ordinary and limited family partnerships. For those advising on the establishment of family investment partnerships, it is suggested that the following practical steps could be taken to avoid uncertainty:

• Ordinary and limited partnerships should be established by a formal partnership agreement, and LLPs should be regulated by a formal members’ agreement.
• The partnership should prepare and adopt a business plan and then periodically review it, setting out a strategy for acquiring and financing the acquisition of investments, including (if relevant) investment properties, and maximising growth in income.
• Where the partnership owns investment property, it may be preferable for the partnership to collect the rent directly and not via an agent.
• Even if an agent is used to find tenants, the partners should themselves interview prospective tenants and take up references.
• If minors are to become partners, it would be prudent for them to attend a meeting at which the adviser explains the arrangements.
• Assets that are held for the family’s personal use and enjoyment, such as the family home, should not be transferred to the partnership or LLP.

(Tax Advisor November 2009 p 34, article by Marc Selby of Leytons)

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MTR is a 90 minute monthly training course, held in London, Ipswich and Norwich – as well as a reference work. Each Issue records the most significant tax developments over a wide range of subjects (see below) during the previous month, containing 30 to 40 items. The aim is not necessarily to take the place of the journals, but rather to provide an easily digestible summary of them and, through the six-monthly Indexes, to build up, over the years, a useful reference work. 

The first aim, therefore, of MTR is to inform. The second and subsidiary aim is to provide a monthly forum for the discussion of issues that tend to come up in professional practice, largely, though not exclusively, prompted by specific items in MTR.

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MTR is designed not primarily for the person who spends 100% of his/her time on tax, but rather for the practitioner (whether private client or company/commercial) for whom tax issues form part of his/her practice. Attendance at MTR qualifies for 1.5 CPD hours for members of the Law Society, for 1.5 CPD points for accountants (if MTR is considered relevant to the delegate’s practice) and (subject to the individual’s self-certification) should also count towards training requirements for the CIOT. For STEP purposes, MTR qualifies for CPD in principle, on the grounds that at least 50% of the content is trust and estate related.  
 
What is the content of MTR?

The material is drawn from HMRC press releases, Tax Bulletins, VAT business briefs, case reports and articles in the professional press. Each item carries a reference as to source which can be followed up if necessary. 

The logic of the ordering of the 12 sections is as follows: first, Capital Taxation (viz 1. Capital Gains Tax, 2. Inheritance Tax and 3. Stamp Taxes). Second, Personal Tax (4. Personal Income Tax). Third, Business Related Matters (viz, 5. Business Tax, 6. Employment, 7. National Insurance and 8. VAT & Customs Duties). And fourth, Miscellaneous (viz 9. Compliance, 10. Administration, 11. European and International and 12. Residue). An annual binder is provided within the subscription cost.

Despite an inevitable element of selectivity, MTR aims to be catholic in its coverage – and this is reflected in the presentations where appropriate: there may well be NI, VAT or employment tax points of which the person advising mainly on estate planning (for example) should at least be aware. That said, the London sessions at least tend to focus, by majority request, on estate planning issues: it is possible that in future one of the sessions might be geared more to company/commercial matters. 

How is MTR circulated?

The Notes are emailed to each delegate in the week before the presentations (and thus can easily be circulated around the office), with a follow-up four or five pages of practical Points Arising during the various sessions (whether in London, Ipswich or Norwich).

For further details, visit http://www.matthewhutton.co.uk/ on Conferences & Seminars and then Monthly Tax Review – or email Matthew on This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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Article Added Sunday, 07 February 2010

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