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HMRC internal manual

International Manual

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DT Applications and claims - Types of income: Pensions and Annuities

Partnership Annuities

Under ICTA88/S628(1) a partnership annuity has to be provided for under the partnership agreement (or other document). This legislation also provides that “the payments shall be treated as earned income of that person”.

Where the partnership itself is paying the annuity to a retired partner, the capitalised value of the annuity is regarded as consideration paid to the retiring partner for their fractional share of the partnership assets, TCGA92/S37(3). The provisions of Section 37(3) over-ride the general rule in subsection (1) that receipts which are liable to Income Tax or Corporation Tax on income are not taken into account as disposal proceeds.

To be able to decide if treaty benefits are available to the retired partners we need to know how the Inspector of Taxes who is responsible for the tax affairs of the partnership thinks the partnership annuities should be classified for UK tax purposes.

Sometimes a partnership agreement will provide for the partnership annuity to be paid out of the worldwide income (including the UK income) of the partnership. The Inspector of Taxes who is responsible for the tax affairs of the partnership should be asked

  • Are the retired partners deemed to be carrying on a business (or performing independent personal services) in the UK.
  • If so, are the partnership annuities “effectively connected to a permanent establishment in the UK”.

If the answer to these questions is “yes” there can be no relief from UK tax under the terms of the “pensions” article of a Double Taxation Agreement (DTA).

However, because of TCGA92/S37 it is possible that the Inspector might conclude that the partnership is under an “obligation” to pay the annuities. It is possible that the Inspector might also conclude that the payments are for “adequate and full consideration”. If the partnership agreement then goes on to provide a formula to calculate the amount to be paid to retired partners this might be considered to be “a stated sum paid periodically”. And if the partnership agreement provides for annuities to be paid for life (or for a number of years) that would satisfy the remaining part of the definition of an annuity used in DTAs. If so, non-resident partners can claim treaty exemption in respect of their partnership annuities under the terms of the general article in a DTA dealing with annuities.

Where a partnership annuity does not contain all of the features that are necessary for it to be an annuity as defined in a DTA it is still possible that relief from UK tax may be available. In these cases it is necessary to consider the terms of the “Other Income” article and to consider if this Article provides an opportunity for relief.

All cases where relief from UK tax is claimed in respect of a partnership annuity are to be referred to Technical Advice Group.