IHTM25102 - Valuing the partnership interest: Partnership share

In Gray v IRC [1994] STC 360, at p.377c (see V.3), Hoffman L J stated that: “As between themselves, partners are not entitled individually to exercise proprietary rights over any of the partnership assets. This is because they have subjected their proprietary interests to the terms of the partnership deed which provides that the assets shall be employed in the partnership business and on dissolution realised for the purposes of paying debts and distributing any surplus. As regards the outside world, however, the partnership deed is irrelevant. The partners are collectively entitled to each and every asset of the partnership, in which each of them therefore has an undivided share. It is this outside view which identifies the nature of the property falling to be valued for the purposes of capital transfer tax, although in accordance with the Crossman principle the restrictions imposed by the partnership deed must be taken into account in assessing its value: see Burdett-Coutts v Inland Revenue Commissioners [1960] 1 WL R 1027. In my judgement, therefore, Lady Fox had for the purposes of section 38 a 921/2% interest in the tenancy which the Lands Tribunal had jurisdiction to value as an interest in land.”

Consequently the valuation of an interest in a business carried on as a partnership should be by reference to the value of the appropriate share of each asset. The previous practice of allowing a discount for the costs of sale is effectively overturned by this decision. That earlier treatment had been based on the general law definition of a partnership share as a proportionate interest in the partnership assets after they have been converted into money, and all the partnership debts and liabilities have been paid and discharged.

In the valuation of an interest in an agricultural tenancy held for the benefit of a farming partnership, the Lands Tribunal made no allowance or discount in calculating the value of a deceased partner’s interest - John Hedley Walton (junior) v IRC [1996] STC 68.

Scotland

In the absence of express provision in the partnership agreement, all the partners have an interest in the entirety of the partnership property but no partner has the right to any particular asset or assets comprised within the partnership property to the exclusion of the other partners. “What is meant by the share of a partner is his proportion of the partnership assets after they have all been realised and converted into money, and all the partnership debts and liabilities have been paid and discharged.” (Lindley & Banks on Partnership 18th Edition at p 518 et seq.) One consequence of this is, that notwithstanding that the partnership assets may include heritable property, nevertheless the partner’s share in the partnership is moveable for the purposes of succession. It is a jus crediti rather than a pro indiviso right. (See Miller on Partnership, 2nd Edition at p 199.)

So far as the partnership was an agricultural tenant, the decision in Baird’s Executors v CIR 1991 SLT (Lands Tribunal) 9 should be kept in view. The court accepted the view that an agricultural tenancy in Scotland does have a value which falls to be arrived at under IHTA84/S160.

Any case where the decision in Baird appears to be material should be referred to Technical Group.