Partnership Property - Importance Of Partnership Agreement
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of the partnership agreement
is well known that a large number of partnerships
do not have a partnership agreement and they need one.
The agreement is important for protection for
asset, dispute and tax protection.
of the 100% Business Property Relief (BPR)
for Inheritance Tax (IHT) can be obtained through the drafting of the
partnership agreement and this should be drawn up so that whilst the
partnership remains in force, the property continues to be a
drafting means the original
owner does not have a “proprietary interest” in the land. The
objective to achieve
100% BPR as opposed
to 50% BPR will then be achieved.
asset is to be held as partnership property but allocated wholly to one
the draftsman’s approach will have to be to ensure that none of the
partners, except the intended ‘owner’, have any “beneficial interest”
used by the partnership
a partner owns property personally (i.e. not on the
partnership balance sheet) which is occupied or used by the
partnership, 50% of
the value of the property will be excluded from the calculation of
(IHT) when that partner dies.
are many tax advisers who argue that the simple
inclusion of the assets on the partnership balance sheet is enough to
that they are partnership property and eligible for 100%
relief. When it comes to the
availability of BPR at
the rate of 100% for land in a partnership case, it is assumed that the
question will come down to whether the land is a ‘partnership asset’,
one that appears to be ‘owned’ by just one of the partners.
It is assumed that if the
land is ‘partnership
property’, then the value of the land will be included in the value of
business or an interest in the business’, qualifying for relief at the
100%. This is an
approach followed in
paragraph IHTM 25104 of the HMRC IHT Manual.
If the property is not a partnership asset, the property
qualify for IHT relief at the rate of 50% under section 102(1)(c) IHT
Clarke  1 A11 ER 779
was a dispute about what was partnership property.
Harman J found that the only term agreed by
the parties in the partnership agreement was that profits should be
rejected guidance from the
accounts because of errors in the way in which they were drawn up, and
down the following principle ‘No more
agreement between the parties should be supposed than is absolutely
to give business effect to that which has happened’ (see
 1 A11 ER at
page 782, letter a). Applying
principle, the trading stock was a partnership asset, but the lease of
premises held in the name of only one partner was not.
property is included on the balance sheet so that
the owner has a beneficial interest but not a proprietary interest,
still the need to prove that the property is a partnership
asset. Case law suggests that
there is an evidential
burden to be surmounted, and also that the courts may be reluctant to
to be surmounted with the aid of accountancy evidence, and a
agreement is needed to protect the tax relief.
In Barton v Morris  1 A11
1032, a man and woman, who were unmarried but who lived
a farm which they held as joint tenants.
They lived at the property and carried on a partnership,
written partnership agreement. The
died in an accident. The
whether the farm had become a partnership property (severing the joint
or whether the partner became solely entitled by
survivorship. The High Court held that
even though the farm
was shown as a partnership asset in draft accounts, it had not been
partnership property. This
reinforced by an earlier decision, Miles
v Clarke (as mentioned above).
importance of the correct drafting of the partnership agreement
number of partnerships operate without a written partnership
agreement, which has obvious dangers as it is important to set out the
upon which the partners agree to carry on business together.
This should go beyond such
matters as profit
sharing, for example to specify what should happen in the future if
there is a
dispute or a partner leaves or dies.
importance of the drafting of the partnership agreement is therefore to
down terms specifying what is to happen when the partnership ceases, or
ceases to be partnership property.
example, if the property is sold, how will the sale proceeds be
treated? Presumably the ‘property
owning’ partner will
have been credited with the value of the property, in his capital
which should be adjusted to take account of any profit or loss
reference to the book value. On
partnership ceasing, the agreement may provide for the property
the property owning partner or towards his capital
BPR for property which may be regarded as
beneficially owned by just one of the partners will obviously require a
carefully drawn partnership agreement.
Not necessarily a deed, as set out by Hoffman LJ in IRC v Gray,
but a detailed written
agreement which defines the
position on partnership assets. Careful
consideration should be given to the “heads of terms” and what all the
set of accounts signed by the parties may well be
regarded as evidence of agreement between the partners on basic trading
concerns, such as the division of the profits shown in the annual
loss account. However,
unsupported by a detailed written agreement cannot suffice by
provide the evidence of the detailed and intricate partnership
agreement as to property
ownership and need to ensure that the property is effectively
owned by just one of the partners.
HMRC of partnership assets and 100% relief
the drafting problems can be overcome, it is
possible to persuade HMRC that an asset, apparently ‘owned’ by just one
partners is partnership property and therefore eligible for 100%
relief. The undisputed facts found
by the First-tier
Tribunal (FTT) in the Balfour case
suggest that in the context of IHT this can be achieved.
partnership agreement is an essential business
“tool” for any partnership. It
essential that all partnerships, especially those who own property,
updated agreement or even start to draft an agreement from
scratch! The practical tip is
agreements are updated (or even drafted for the first time), it should
understood what is required both in terms of what the partners want and
the tax efficient inclusion of property.
It is important to establish who owns what property, what
reliefs can be
achieved and what protection there could be when BPR is needed at the
About the Author
Supplied by Julie
F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire,
Tel: 01962 735544. Email; firstname.lastname@example.org,
the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine
ISBN: 0406966540, and Stanley: Taxation
of Farmers and Landowners (LexisNexis).
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Article Published/Sorted/Amended on Scopulus 2013-11-27 09:16:23 in Tax Articles