IHTM25120 - Valuing businesses and
partnerships: Fetters
A restriction on a partner's right to freely dispose of his
partnership share is called a "Fetter".
In most cases the open market value of the partnership
interest is required. Occasionally however the taxable value may be
something other than the open market value.
Articles of Partnership sometimes provide that a deceased
partner's interest in the partnership should pass to the surviving
partners:
- at a book figure (i.e. the figure at which the
capital account stood in the last published balance sheet prior to
death); or
- for no payment at all or for a fixed sum.
Alternatively:
- the surviving partners might have the option to
purchase the deceased's share in the business for a fixed price or
a balance sheet figure.
These provisions in the Articles restrict the deceased's ability
to dispose of his partnership interest as he wishes. Once the
Articles have been entered into, the partner cannot make a
provision in their will to direct how their share in the business
will pass (the surviving partners take automatically, or have an
option to acquire the deceased's share, though they usually have to
pay something to the estate).
- The rule is that a fetter is to be taken into account for IHT
valuation purposes only to the extent that consideration in money
or money's worth has been given for it,IHTA84/S163 (1)(a).If the
fetter was not granted for full consideration then the open market
value of the deceased's interest will be taxable.
- If the fetter was granted before 27 March
1974 other than for full consideration, there is no problem. Simply
value the deceased's interest on an open market basis.
- If the fetter was created after 26 March
1974, the deceased may have made a chargeable transfer by
restricting his freedom to dispose of the partnership interest when
entering into the Articles of Partnership. You should ascertain an
open market value on the death and allow against it a deduction for
any lifetime transfer agreed to have been made by the deceased at
the time he entered into the Articles,IHTA84/S163 (1)(b). For
example the deceased took his daughter into partnership in 1995 and
by the Deed of Partnership, the share of a deceased partner was to
pass to the survivor without payment. The value of the transfer on
the creation of the fetter is agreed at £10,000. When the
deceased dies in 2000, the open market value of his partnership
interest (we ignore the fetter) is agreed at £30,000.
The taxable value on death is £30,000 less £10,000 =
£20,000. However, the lifetime cumulative total of
£10,000 means that the aggregate total of cumulative
chargeable transfers is the same.
- If the fetter was granted for full consideration, then only the
fetter price will be taxable on the death and you do not need to
ascertain an open market value.
- Sometimes, the Articles of Partnership provide that the
deceased's share in the partnership is to pass to the surviving
partners in return for the payment of an annuity to the deceased's
widow or surviving civil partner. Basically, if such an arrangement
was made for full consideration, the deceased's partnership
interest will be exempt (spouse or civil partner exemption
IHTA84/S18). If the arrangement was not made for full
consideration, the open market value will be taxable on death but a
deduction will be given against that figure for the capital value
of the annuity to the spouse or civil partner which is spouse or
civil partner exempt.
Categories (2) and (3) are relatively uncommon. In the vast
majority of cases an open market value at the date of death will be
required.
