Conversion: Scottish limited partnerships: commencement and cessation
Before being admitted as members of Lloyd’s, the form of the partnership agreement has to be approved by Lloyd’s. In particular, the partnerships are required to adopt 31 December as their accounting date, and other than when the partnership is first set up, partners may only join on 1 January and leave on 31 December. This ensures that the rules about commencements and cessations and so forth are relatively straightforward, permitting the disapplication of most of the cessation provisions in the FA93 and FA94 rules and those in regulations 9 - 17 SI1995/351.
The commencement and cessation provisions in Chapter 15 of Part 2 of ITTOIA 2005 (formerly ICTA88/S60(2) to (5) and S61 to 63A) are specifically disapplied to Lloyd’s SLPs (regulation 6(1)(a) SI1997/2681).
Commencement of the partnership
An SLP typically sets itself up shortly before the beginning of the underwriting year for which it will first write business. Its first accounts run to the end of that underwriting year, and will therefore be for a period exceeding one year (regulation 6(2)(b)(ii) SI1997/2681). For example, if the partnership began on 1 July 2004 and first wrote business for the 2005 account, the first accounts will be for the period from 1 July 2004 to 31 December 2005. That entire period forms the basis of assessment for the tax year in which it ends, so that the profit or loss for that period will be taken into account for tax purposes in the 2005-06 tax year for individual partners. This will include any income derived from assets held as Funds at Lloyd’s (ancillary trust fund assets).
The tax return for that first period asks for details of some types of income, such as taxed interest, for the tax year. This means that income arising before the start of the tax year must be returned by the individual partners on their own returns. For example, in the circumstances above, any income of this type arising between 1 July 2004 and 5 April 2005 will not be included in the partnership return and must be notified to the individual partners so that they can include it in their own self assessments for the year 2004-2005. This only applies to the first year of trade.
Partners joining and leaving SLP
Once the SLP is established partners can only join or leave as at 31 December in any year. Unless the change is by way of assignation, the Scots law equivalent of assignment, a joining partner starts with a clean sheet, and a leaving partner (while no longer continuing to share in the profits or losses of new business) remains a partner until all of the syndicate years of account the partnership participated on since that partner joined have been closed. For instance, a partner decides he no longer wishes to share in the profits or losses of business written on or after 1 January 2006. The final year of account in which he has an interest is 2005, and that account closes 31 December 2007, with results declared in June 2008. This leaving partner remains a partner until 31 December 2008.
Assignation of partnership interest
Partners can assign their interest in an SLP to a new partner, but again this can only take place as at 31 December in any year. Assignation in this context means that the succeeding partner becomes a partner in the place of the departing partner and will receive (and be taxed on) profits allocated to him in respect of subsequent accounting periods of the partnership (whether or not the business concerned was written before or after the assignation) and be liable for losses in the same way. These benefits and risks will be reflected in the price paid on assignation, which is itself chargeable to capital gains tax.
Death of partner
When partners die, their involvement in future business comes to an end, but their personal representatives are regarded as conducting the trade until matters are wound up. Lloyd’s require the partnership agreement to allow a limited period (generally 60 days) during which it is possible for the executors to assign the partnership interest, but failing that the estate will have to wait for all of the relevant syndicates to close (regulation 9 SI1997/2681).
This method for determining the final tax year of assessment for the deceased partner personally in respect of his partnership interest follows the rules that apply for determining the final tax year of assessment for deceased Names personally - see LLM5340.