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HMRC internal manual

Partnership Manual

Calculating the taxable profits: Partnership annuities: current partners

The current partners will receive income tax relief for the payments through their own self assessment returns. This will be via ITA2007/S448, which gives tax relief to an individual who makes an annual payment from which tax must be deducted. Help on how to claim this relief is available in the SA101 Additional Information Notes Worksheet (which can be accessed on the HMRC internet site).

In the event that the annuities are payable by a partnership which has incorporated as an LLP (where the obligation to pay the annuity arose before becoming an LLP), the situation may be slightly different, depending on whether the obligation was transferred to the LLP or not. Where the obligation has been transferred, all current members (including incoming members) assume part of the obligation and will be entitled to income tax relief. However, where the obligation is not transferred to the LLP and the members of the old partnership continue to pay it, they will be entitled to income tax relief for their share of those payments until such time as they cease to be a member of the LLP or until the business originally carried on by the old partnership ceases, whichever is the earlier. Incoming partners have no obligation to pay the annuity.

There is a situation in which income tax relief on annuity payments will not be available. This will apply when the obligation to pay the annuity has been assumed as part of the consideration for the acquisition of a partnership business. This matter arose in the case of Parnalls Solicitors Ltd v HMRC [2009] UKFTT 318 (TC), which was heard before the First Tier Tribunal in 2009. In finding such payments to be of a capital nature, the Tribunal applied a principle derived from the cases of Royal Insurance Company v Watson and Commissioner of Inland Revenue v New Zealand Forest Research Institute Ltd: “where an obligation…is assumed as part of the purchase price, or consideration, for the purchase of assets on a transfer of a business, payments in discharge of that obligation are capital expenditure, and not revenue expenditure”. It is important to be aware of this distinction as a partnership business may have been subject to a merger or acquisition.