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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Other relevant business property: Partnership interests

If there was a lifetime transfer from a partner’s capital account you may need to consider the effect of the additional conditions (IHTM25361) in IHTA/S113A and IHTA84/S113B on the availability of the relief at the time of the transfer and on the transferor’s death.

Whether a transfer from a partner’s capital account in the partnership qualifies for business relief at the time of the transfer depends on whether it effectively transfers an ‘interest in a business’. You will need to consider the precise facts of each case. For example

  • if the transfer reduces the transferor’s interest in the business and enhances the similar interest of a co-partner, the transfer is within IHTA84/S105(1)(a). So you should normally accept a transfer from the capital account of a partner to that of another partner as within IHTA84/S105 (1)(a);
  • if however the circumstances suggest that in substance it was merely a gift of cash, or its equivalent which could be withdrawn from the business, you should consider whether relief should be refused;
  • a transfer to a third party who neither is nor becomes (in connection with that transfer) a partner clearly does not qualify for relief; the transfer is not of an interest in the business and the transferee is merely a creditor for the amount transferred to him.

If the taxpayer claims relief on the death of a salaried partner refer the case to Technical to consider in the light of the terms on which the partnership operated.

For a transfer of an interest in any land or buildings, machinery or plant used by a partnership, there may be relief under IHTA84/S105 (1)(d) (IHTM25225).

Under IHTA84/S110(c) only those assets used to calculate the net value of the entire business are taken into account. This refers back to the rules (IHTM25341) in IHTA84/Ss110(a) and (b). One example of the operation of this provision concerns a partner’s Income Tax liability on their share of the partnership profits. As the partner’s tax is not a liability incurred for the purposes of the business, it should not be taken into account in determining the net value of the partnership for the purposes of business relief.

The case of Beckman v IRC [2000] STC (SCD) 59 is clear authority for the proposition that a loan made by a third party (in this case a retired partner), does not attract business relief. Although the interest was described as a capital account, the retired partner was in fact a creditor of the business. We consider that a partner’s tax reserve also represents a loan to the partnership, and does not attract business relief.