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HMRC internal manual

Capital Gains Manual

Partnership annuities: SP D12

Section 9 of SP D12 explains the treatment of annuities paid to retired partners.  Statement of Practice 1/79 (SP1/79) applies where a lump sum is paid in addition to an annuity.

Annuities purchased for retired partners by a partnership

The cost of an annuity payable by an assurance company represents consideration in the form of money’s worth paid by the remaining partners for the acquisition of the retiring partner’s fractional interest in the partnership assets.

Annuities paid to retired partners by a partnership

TCGA92/S37(3) applies to treat the capitalised value of an annuity payable by a partnership to a retired partner as consideration for the disposal of the partner’s fractional interest in partnership assets.  The rule in TCGA92/S37(3) over-rides the general rule in TCGA92/S37(1) that receipts which are chargeable to Income Tax or Corporation Tax as income profits are excluded from the consideration taken into account for the disposal of assets.

However, section 9 of SP D12 treats the capitalised value of an annuity as consideration only if it is regarded as more than a reasonable recognition of the retired partner’s past contribution of work and effort to the partnership, see below.

If the capitalised value of an annuity is treated as consideration paid to a retiring partner an equivalent amount will be allocated as acquisition costs among any partners whose fractional interests are correspondingly increased.  However, where the capitalised value is not regarded as consideration it should not be treated as an acquisition cost of the partners whose fractional interests are increased.

Reasonable recognition

Reasonable recognition is based upon a fraction of the retiring partner’s interest in the profits of the partnership. The fraction used depends on how long the individual concerned had been a partner.

Partner for 10 years or more

The figure is based upon a maximum of two thirds of the partner’s average share of profits (before deduction of any capital allowances, charges or losses) in the best three of the last seven years in which he devoted substantially the whole of his time to acting as a partner.

The 10-year period should include any period during which the partner was a member of a partnership whose business has been merged with the partnership, see CG27700.[DN Jill – please delete the 2 bullets below and move text left to same margin as above.]Partner for fewer than 10 years

The fraction to be used should be taken from the table below:

 

Complete Years in Partnership Fraction
   
1-5 1/60 for each year
6 8/60
7 16/60
8 24/60
9 32/60

 

The amount of the annuity payable by a partnership to a retiring partner may be stated as a percentage of future partnership profits rather than as a fixed sum. In most cases a reasonable estimate of the amount likely to be paid will fall within the above limits. You need not, therefore, spend time discussing the probable level of future annual payments in cases that are clearly marginal.

Where the amount exceeds the appropriate limits, the capitalised value of the annuity will be treated as consideration for the disposal of the partner’s fractional interest in partnership assets.

Capitalised values – obtaining advice

Advice on the amount of the capitalised value of an annuity can be obtained from the Actuarial Team, Nottingham, Specialist PT IHT Technical. You should supply details of the terms of the annuity and the age and sex of the retiring partner and any other possible recipient, for example, the retired partner’s widow.

Advance clearance

If you are asked to comment on whether a proposed annuity would be within the appropriate limits you should restrict your answer to a general outline of section 9 of SP D12.

Lump sum paid in addition to an annuity - SP 1/79

Statement of Practice 1/79 (SP1/79) applies where a lump sum is paid in addition to an annuity.

Statement of Practice 1/79

The text of SP1/79 is reproduced below:

Paragraph 8* of SP D12 explains the circumstances in which the capitalised value of an annuity paid by a partnership to a retired partner will not be treated as consideration for the disposal of his share in the partnership assets. The Commissioners for HMRC have now agreed that this practice will be extended to certain cases in which a lump sum is paid in addition to an annuity. Where the aggregate of the annuity and one-ninth of the lump sum does not exceed the appropriate fraction (as indicated in the Statement) of the retired partner’s average share of the profits, the capitalised value of the annuity will not be treated as consideration in the hands of the retired partner. The lump sum, however, will continue to be so treated.

This extension of the practice will be applied to all cases in which the liability has not been finally determined at the date of this Notice.

(*Paragraph 8 is now section 9)

This means that where a lump sum is paid to a retiring partner in addition to an annuity:

  • the capitalised value of the annuity should not be treated as additional consideration for the disposal of the partner’s fractional interest in partnership assets provided that the aggregate of the capitalised value of the annuity and 1/9th of the lump sum does not exceed the appropriate fraction set out above,

but

  • the lump sum should be treated as consideration for the disposal of the retiring partner’s fractional interest in partnership assets.

 

The rules set out in CG28400 apply to annuities paid by a partnership to a retired partner.

Statement of Practice 1/79 (SP1/79) applies where a lump sum is paid in addition to an annuity.

Statement of Practice 1/79

The text of SP1/79 is reproduced below:

Paragraph 8 of SP D12 explains the circumstances in which the capitalised value of an annuity paid by a partnership to a retired partner will not be treated as consideration for the disposal of his share in the partnership assets. The Commissioners for HMRC have now agreed that this practice will be extended to certain cases in which a lump sum is paid in addition to an annuity. Where the aggregate of the annuity and one-ninth of the lump sum does not exceed the appropriate fraction (as indicated in the Statement) of the retired partner’s average share of the profits, the capitalised value of the annuity will not be treated as consideration in the hands of the retired partner. The lump sum, however, will continue to be so treated.

This extension of the practice will be applied to all cases in which the liability has not been finally determined at the date of this Notice.

This means that where a lump sum is paid to a retiring partner in addition to an annuity:

  • the capitalised value of the annuity should not be treated as additional consideration for the disposal of the partner’s fractional interest in partnership assets provided that the aggregate of the capitalised value of the annuity and 1/9th of the lump sum does not exceed the appropriate fraction set out in CG28400

but

  • the lump sum should be treated as consideration for the disposal of the retiring partner’s fractional interest in partnership assets.