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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate debt: transfers of income streams: company transferors: partnership shares

Company transferors: partnership shares

CTA10/S756 prevents the transfers of income stream legislation from applying to virtually all transfers of the right to relevant receipts when a company reduces its share in the profits of a partnership of which it is a member. The legislation does, however, take effect if the partnership change is driven by avoidance.

The relevant amount will not be treated as income of the transferor where either or both of two conditions is fulfilled:

  • Condition A is that there is a reduction of the transferor’s share in the overall partnership property and the reduction in the transferor’s entitlement to relevant receipts is in the same proportion.
  • Condition B is that it is not the main purpose or one of the main purposes of the transfer to secure that the relevant receipts are not charged to corporation tax or income tax on any partner.

Example 1

If M Ltd reduces its interest in a partnership by transferring it to another UK company, P Ltd, then M Ltd cannot be taxed on the market value of the relevant receipts, provided that its share in partnership profits or losses is reduced in the same proportion so that condition A is fulfilled. Even if this were not the case, as P Ltd is a UK company within the charge to corporation tax it is unlikely to have been a purpose of the transfer that the relevant receipts escape corporation tax, so condition B is also fulfilled. Where either condition A or condition B is met the provisions of S753 will not apply.

Example 2

Q Ltd is a member of a partnership. A new member is admitted to the partnership and Q Ltd’s profit sharing entitlements are reduced without a reduction in its share of the partnership assets. If one of the main purposes of Q Ltd’s reduction in profit share is to secure that the income on which it would otherwise have been charged to tax escapes taxation (both in its own case and in the case of the new member) then Q Ltd will be charged to tax on the consideration for or the market value of the income it foregoes.