IHTM25250 - Other relevant business property: Partnership interests

If there was a lifetime transfer from a partner’s capital account you may need to consider the effect of the additional conditions (IHTM25361) in IHTA/S113A and IHTA84/S113B on the availability of the relief at the time of the transfer and on the transferor's death.

As noted at IHTM25152 we previously considered that for business relief to apply, a transfer from a partner's capital account in the partnership must have effectively been a transfer of an ‘interest in a business’ at the time of the transfer. So, for example, a transfer of an individual asset or a transfer to a third party who is not, nor becomes, a partner would not qualify for relief.

However, following the approach taken in the case of HMRC v Trustees of the Nelson Dance Family Settlement [2009] EWHC 71 (Ch), it is accepted that business relief will apply if the transferor’s relevant business property is decreased as a result of the transfer of value. 

You will still need to be satisfied that the asset(s) transferred were used in the business of the partnership, IHTA84/S110, and were not ‘excepted assets’ under IHTA84/S112 (IHTM25351). If the transfer was made within 7 years of the transferor’s death you will also need to consider the additional conditions in IHTA84/Ss113A and B, as noted at the top of the page.

If you have any doubts, seek advice from Technical.

If the taxpayer claims relief on the death of a salaried partner, refer the case to Technical to consider in the light of the terms on which the partnership operated.

For a transfer of an interest in any land or buildings, machinery or plant used, but not owned, by a partnership, there may be relief under IHTA84/S105 (1)(d) (IHTM25225).

Under IHTA84/S110(c) only those assets used to calculate the net value of the entire business are taken into account. This refers back to the rules (IHTM25341) in IHTA84/Ss110(a) and (b). One example of the operation of this provision concerns a partner's Income Tax liability on their share of the partnership profits. As the partner's tax is not a liability incurred for the purposes of the business, it should not be taken into account in determining the net value of the partnership for the purposes of business relief.

The case of Beckman v IRC [2000] STC (SCD) 59 is clear authority for the proposition that a loan made by a third party (in this case a retired partner), does not attract business relief. Although the interest was described as a capital account, the retired partner was in fact a creditor of the business. We consider that a partner's tax reserve also represents a loan to the partnership, and does not attract business relief.