Section 19: partnership property
The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.
In England and Wales a partnership does not have a separate legal identity as a company does for instance. It is simply a collection of individuals who trade together with mutual obligations sharing risks and profits. Partnership property is property, which is owned or occupied by the partners subject to the terms of the partnership. These terms may be embodied in a specific partnership deed or alternatively imputed by virtue of the Partnership Act 1890.
The nature of a partner’s interest
In the Court of Appeal decision in IRC v Gray (Executor of Lady Fox deceased (1994) (see Practice Note 1, Appendix F), Hoffman L J had the following to say with regard to the nature of partners’ interests:
“As between themselves, partners are not entitled individually to exercise proprietary rights over any of the partnership assets. This is because they have subjected their proprietary interests to the terms of the partnership deed which provides that the assets shall be employed in the partnership business and on dissolution realised for the purposes of paying the debts and distributing any surplus. As regards the outside world, however, the partnership deed is irrelevant. The partners are collectively entitled to each and every asset of the partnership, in which each of them therefore has an undivided share. It is this outside view which identifies the nature of the property falling to be valued…, although in accordance with the Crossman principle the restrictions imposed by the partnership deed must be taken into account in assessing its value….”
Consequently the valuation of an interest in a business carried on as a partnership should be by reference to the appropriate share of each asset and, in arriving at this valuation, regard will need to be had to the terms of the partnership deed or (in the absence of the partnership deed) the relevant provisions of the Partnership Act 1890.
19.3 Partnership deeds
A partnership does not have to be constituted in writing but if it is HMRC(IHT) will normally obtain a copy of the agreement or obtain details of the main clauses from the parties. These details should be provided when a reference is made to the VOA.
Partnership agreements often contain specific provisions regarding the freedom of individual partners to dispose of their interests. There may, for instance, be a provision that in the event of the death or retirement of a partner any interest in partnership property is taken over by the other partners with specific terms as to consideration payable (if any) which may not amount to market value as defined in s.160 IHTA 1984. Such provisions are dealt with for IHT purposes by s.163 IHTA 1984 which provides that this sort of restriction on the freedom to dispose of property can only be taken into account to the extent that consideration was given for it in money or money’s worth when it was created, generally on the execution of the partnership deed. If full consideration was given, then the operation of the provisions will be accepted. and if no consideration was given it will be ignored. Alternatively, if some, but not full, consideration was given this will be taken into account. Any queries as to whether s163 IHTA 1984 applies to any specific provision in a deed should be referred to HMRC(IHT) for consideration.
In general, where a partnership comprises individuals who are not related to one another (other than in a business context) the terms of a partnership deed may be presumed to be for the mutual benefit of all the partners with no intended gratuitous transfer of value from any one to another. In the case of a family’s partnership, however, HMRC(IHT) will take full account of the terms of the partnership agreement.
19.4 No partnership deed
Where there is no express agreement, a partner’s rights and obligations are governed by the terms of the Partnership Act 1890.
Of particular interest is Section 26 of the Act, which states that, where no fixed term has been agreed upon for the duration of the partnership, any partner may determine the partnership at any time by giving notice. (N.B. This section is also relevant in cases where a partnership deed exists which contains no provisions regarding duration).
Reference of cases
19.5 Reference by HMRC(IHT)
HMRC(IHT) will decide when property is to be regarded as a partnership asset and will advise DVs accordingly. They will advise the DV of the size of the partner’s share to be valued and provide details of all the partners’ beneficial interests in the assets or, if not known, will state the number of partners and the way in which the profits are divisible between them. If a partnership deed is available, this will also be forwarded.
Cases involving partnership property should be treated as non-standard references (see Section 26 para. 26.13) and should initially be registered as case type 181/01.
Basis of valuation
19.6 Differing basis for CGT and IHT
The treatment of partnership property differs between CGT and IHT. For CGT the Inspector usually requires the entirety value without discount. For IHT purposes the basis of valuation is as set out in 19.7 below.
19.7 Basis of valuation for IHT
Following on from the “Lady Fox” case (see para. 19.2 above), the valuation required is the open market value of the appropriate share in each partnership asset.
In cases where a partnership deed exists, particular regard should be paid to any provisions contained therein concerning the calculation of the value of a partner’s share on death or retirement.
In cases where no partnership deed exists, under section 33(1) Partnership Act (1890), the death of a partner will dissolve the partnership. This section also applies to partnerships in cases where no contrary agreement is contained in the deed. Following the dissolution of the partnership under section 33(1), section 39 operates to entitle each partner to an appropriate share in the partnership assets.
19.8 Discount for a share
As mentioned at para. 19.7 above, an individual partner may be in a position to bring about the dissolution of the partnership if they so wish. In practice it may not be necessary to take such a drastic step in order for a departing partner to realise the value of their assets, since the mere threat of dissolution might induce their fellow partners to buy out their share. The valuation should reflect the circumstances as they exist at the date of valuation and, accordingly, it will normally be necessary to make some discount from the appropriate arithmetical share of the entirety value in order to reflect the fact that the hypothetical purchaser of the partner’s share will have to take steps to set these events in train (however, see para. 19.9 below for an exception to this rule).
The amount of such a discount will not normally be as great as in a case involving a similar sized undivided share held under a trust of land (see Section 18 and Practice Note 2). This is because, the purchaser of a partner’s interest will normally be in a much stronger position to realise the full value of their proportionate share of the entirety than a tenant in common - a purchaser of the latter interest would normally need to apply to the Court to request an order for sale and the chances of obtaining such an order are by no means clear cut (see Practice Note 2, para. 7.3).
The amount of any discount should not, therefore, normally exceed 10%.
19.9 Agricultural tenancies
In the case of J H Walton (deceased) v CIR (1995) the Lands Tribunal made no deduction from the appropriate arithmetical share of the entirety value to reflect the fact that the deceased’s share in a partnership asset comprising an agricultural tenancy. The decision in “Walton” should be followed in similar cases involving the valuation of an agricultural tenancy (i.e. where there is no special purchaser for the asset and the entirety value is arrived at by capitalising any profit rent).
19.10 “Package” valuations
In certain instances where an individual transfers a substantial interest in both the freehold of a property and a partnership which occupies the same property, consideration may be given to the greater value of the two interests being offered for sale on the market together as a package as opposed to the sum of their individual values - see 9.13 to 9.17 for an explanation of the principles and procedure and Practice Note 1 Appendix F for CIR v Gray (Executor of Lady Fox deceased). As it is the responsibility of HMRC(IHT) to value a transferor’s estate, the DV should only adopt a package approach when asked by them to do so.
19.11 Partnership property in Scotland
In Scotland, a partnership has a separate legal persona and can, therefore, own heritable property. It follows, therefore, that when valuing partnership property in Scotland the entirety value is required without discount. In cases of difficulty or where the parties contest the basis of valuation or raise other matters of principle, the case should be submitted to CEO (DVS) for advice.
19.12 Advising the parties of the basis adopted
When the parties are notified of the DV’s valuation(s), either on Form VO 1101 or otherwise, the DV must make the basis of valuation known to the parties, i.e. stating that the valuation is of a proportionate share in a partnership asset. The parties should be left in no doubt as to whether a discount has or has not been applied. In cases of difficulty or where the parties contest the basis of valuation, the case should be submitted to CEO (DVS) for advice.
Cases should be reported in accordance with Section 27 Part 5. No special endorsements are required to reflect the fact that the interest being valued is a proportionate share in a partnership asset.