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HMRC internal manual

Business Income Manual

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Partnerships - general notes: property

S20, S21, S24, S44 Partnership Act 1890

It may be necessary for the purposes of applying the tax rules, e.g. in applying the capital allowances or capital gains rules, to determine whether a particular asset is partnership property or in the alternative the personal property of one or more of the partners. The guidance below sets out the rules that need to be considered in relation to general partnerships governed by the Partnership Act 1890 and limited partnerships registered under the Limited Partnership Act 1907. The rules that apply in England and Wales also generally apply to Northern Ireland. Should you require further advice on how these rules should be applied in a particular case please contact CTISA (Technical) or, if the Capital Gains Tax rules are specifically in point, Capital Gains, Specialist PT (Solihull).

The starting point for the examination of this issue is the general statutory definition of ‘partnership property’:

‘All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.’

It will be seen that there are two circumstances in which an asset becomes partnership property. These are:

  • property etc. originally brought into the partnership stock;
  • property etc. acquired, whether by purchase or otherwise, (i) on account of the firm, or (ii) for the purposes and in the course of the partnership business.

An example of the first will be where two persons agree to carry on business in partnership. One brings into the partnership stock £100,000 cash and the other a property valued at £100,000. Both items will be regarded as partnership property.

An example of the second will be a continuing partnership acquiring a property to be used in the partnership’s business with partnership monies. The property will normally be regarded as partnership property unless there is specific agreement between the parties that it should not be so regarded or there are other circumstances indicating that the property is not partnership property.

Problems may arise when trying to establish whether a particular asset is partnership property or the personal property of a particular partner. There may be a partnership agreement that makes clear the intentions of the partners of what assets they regard as partnership assets and those they regard as the personal assets. And even if there is no explicit agreement the evidence of the partnership balance sheet may confirm the status of the asset as being partnership property.

Whilst such an agreement/balance sheet entry may be regarded as initial evidence as to whether or not a particular asset is partnership property it is not conclusive. And in cases where there is a dispute as to status you will need to obtain all the documentation together with the oral testimonies of the parties to establish what the true position is. If it is alleged that property is held by a partner in trust for a Scottish partnership the matter will be governed by S1(2)(a)(iii) and S2 Requirements of Writing (Scotland) Act 1995. The effect of those provisions is that, as a general rule, a written document subscribed by the granter is required in Scotland for the constitution of a trust whereby a person declares himself to be sole trustee of his own property or any property which he may acquire.

When considering these points you should note that the mere use by a partnership of a particular asset does not mean that the asset is partnership property. In such cases one needs to establish whether it was the intention of the parties that it should be regarded as a partnership asset. On the other hand if the asset has been acquired with partnership monies this is prima facie evidence that the asset is partnership property. This relevant legislation provides:

‘Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm.’

In England and Wales, two or more partners as joint tenants upon trust will normally hold the legal title to partnership property for all the partners including themselves. This will be particularly the case with land as it is not possible for land to be vested in the names of more than 4 partners. That does not mean however that this creates a Trust in the generally accepted meaning of that word. The partners holding the legal title do so as bare trustees for themselves and the other partners. In Scotland, partnership property belongs to the firm itself rather than the partners.

In England and Wales, even though a partner may not hold the legal title to partnership property each partner nevertheless has a beneficial interest in partnership property. In Scotland, however, the partners have no direct interest in partnership property.

In commercial law in England and Wales the partner’s interest in partnership property is not a proportionate interest in each asset but rather an undivided interest in the totality of the partnership property. In Scotland, a partner merely has an interest in the partnership rather than an interest in the partnership property.

The quantum of that interest cannot be finally determined until the partnership is finally wound up (or perhaps earlier should all the assets be sold and the net proceeds after paying liabilities distributed).

Normally the quantum of that interest is determined by the terms of the partnership agreement but in default the statutory provisions apply. In the latter circumstances each partner in England and Wales is regarded as having an equal share in the partnership assets. But in Scotland the position is that a partner’s interest is determined by statute, which provides that ‘on a dissolution of the firm the assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order: 1. In paying the debts and liabilities of the firm to persons who are not partners therein; 2. In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital; 3. In paying to each partner rateably what is due from the firm to him in respect of capital; 4. The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.’

Although a partner in England and Wales holds an undivided interest in partnership property and although a partner in Scotland has no direct interest in partnership property, for Capital Gains Tax purposes partnership dealings are treated as dealings by the partners and not by the firm as such. In these circumstances, we regard each partner as owning a fractional share in each of the partnership assets. Guidance on this point is to be found at CG27000 onwards. Each partner’s fractional share is determined by the terms of the partnership agreement but in the default statutory provisions apply.