Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about the transfer of a deceased partner’s share to the partnership.
‘I act for a partnership of three partners where profits, losses and gains are shared equally. The partnership agreement says that, on the retirement or death of a partner, their interest in the partnership assets would be sold to the remaining partners. One of the partners has just died and I am trying to work out the capital gains consequences.
At first sight it seems straightforward. On the partner’s death, the fellow partners will acquire a one-third share of the partnership assets at their agreed market value. There is no tax on the disposal as death is not an occasion of charge for capital gains tax purposes. But I am worried that it may be more complex than this.
First, it is not the deceased partner making the disposal, it is the executors after death who are making the disposal to the remaining partners. Does that mean that the executors are treated as making a disposal at market value?
There may be no gain if they sell straight away as their base cost will be market value on death and that is unlikely to increase in the period before sale.
But there is a further complication.
The partnership agreement states that the sale should be at market value less a discount of 10%. If the executors acquire the share at market value but then sell for 90% of that value there is a loss, is that an allowable loss if the executors and the continuing partners are not connected persons? Or must market value be used rather than the sale proceeds?
Is there anything for me to worry about here?’ Query 19,961 – Bristolian.
Terry Jordan’s reply: Achieve the desired outcome by a cross option agreement.
‘One of three partners where profits, losses and gains are shared equally has died and the partnership agreement provides that on the death of a partner their interest is to be sold to the remaining partners.
All the assets of the deceased which pass to his or her personal representatives are deemed to have been acquired by them at market value at the date of death under TCGA 1992, s 62 (1) (b) without a CGT charge arising. The market value at the date of death should be used as the acquisition cost in any computation for sales of assets made by the personal representatives. Section 274 provides that if a value has been ‘ascertained’ for inheritance tax purposes that value is to be used for capital gains tax purposes. In some circumstances, for example if 100% business property relief is available or the spouse exemption applies, the value may not be ‘ascertained’ in the technical sense, and it would be open to the personal representatives to agree a figure with the inspector.
The partnership agreement states that the sale to the surviving partners should be at market value less a discount of 10%. On the premise that the personal representatives are not themselves in partnership with the surviving partners (see Newbarns Syndicate v Hay (HMIT) (1939) 22 TC 461 ) s 18 should not apply and the losses arising should not be ‘clogged’. Any losses may only be used against gains made by the personal representatives in the same or subsequent tax years while the administration of the estate continues and cannot be passed on to be set against gains of legatees. (If relevant the personal representatives would have the same annual exemption as an individual, currently £12,300, for the tax year of death and the following two tax years.)
We are not told the nature of the partnership’s activities. If the value of the share of the deceased would otherwise have benefited from business property relief a binding contract for sale would preclude the relief under IHTA 1984, s 113. The usual advice would have been to achieve the desired outcome by a cross option agreement.’
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