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Tony Wickenden: HMRC clarifies BPR exemptions for shares held by LLPs

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Last week I started to look at the apparent denial of business property relief for IHT purposes where a partnership or LLP owns shares in an unquoted trading company where, if held directly by an individual, those shares would (subject to satisfying the usual conditions) qualify for BPR.

I will again draw on the ICAEW statement on this issue in this week’s piece.

By way of reminder, to qualify for BPR the business of the partnership/LLP must not be wholly or mainly that of making or holding investments and holding shares in a trading company is primarily an investment activity. If it carries on a trade in addition to holding shares, it could have a hybrid business which is not wholly or mainly one of making or holding investments, dependent on the facts.

For companies whose activity is wholly or mainly being the holding company of a predominantly trading group there is a specific let out so that they can qualify for BPR (section 105(4)(b) IHTA 1984), but there is no such let out for partnerships/LLPs owning shares in trading companies.

This is an obvious potential flaw in the legislation and one, according to the ICAEW, that could not have been intended.

So let’s look first at what the IHT manuals state.

IHTM25094 – What is a partnership; limited liability partnerships

The HMRC manual states: “The Limited Liability Partnerships Act 2000 came into force on 6 April 2001. Its main purpose and effect was to introduce a new form of legal entity known as a limited liability partnership. The pressure for the change was largely to resolve problems arising out of the nature of traditional partnerships for larger professional practices, but the use of LLPs is not restricted to them.

“These practices, usually accountancy or law firms, can have partners world-wide who may be concerned about the fact that they have been subject to joint personal liability on matters over which they had little control.

“The LLP Act 2000 has made a small amendment to the IHT legislation by directing (under s.11 LLP Act 2000) that a new paragraph (IHTA84/S267A) should be inserted after IHTA84/S267. The effect of this paragraph is that we look through LLPs so that they will be treated in the same way as traditional partnerships.

”The result of this is that:

  • Where a traditional partnership incorporates itself as an LLP, a partner’s period of ownership for the purposes of qualifying for business (or agricultural) relief will not be regarded as being interrupted.
  • The normal reliefs and exemptions available to partners in a traditional partnership will also be available to members of a LLP. In particular, IHTA84/S10 (which provides an exemption for dispositions not intended to confer gratuitous benefit) will apply.

“A further change is that an interest in an LLP is deemed to be an interest in each and every asset of the partnership, while an interest in a traditional partnership is a ‘chose in action’, valued by reference to the net underlying assets of the business. This may require you to consider issues of situs of property. In cases of doubt refer to Technical Group for advice.

“However, in considering if an LLP is an investment business (IHTM25261), you should look at the nature of the business underpinned by those assets, rather than the nature of the assets themselves, to see whether IHTA84/S105(3) is in point.

”Thus, in the case of an LLP investing in unquoted shares in trading companies, it would be inappropriate to allow relief on the basis that the underlying assets constitute business property: the true position is that the nature of the business conducted by the LLP falls within IHTA84/S105(3) so that relief is not available.”

After considering the ICAEW questions and the manuals HMRC’s replies, as published by the ICAEW, were as follows:

“We do not think that how a partnership or LLP’s activities are regarded for the purposes of determining whether it is carrying on an investment business for the purposes of s.105 (3) IHTA 1984 necessarily conflicts with our view that BPR is not available in relation to an interest in a partnership or LLP whose business is the holding of shares in unquoted trading companies (which could qualify for BPR if held directly by the individual partner). Therefore the view set out in IHTM25094 continues to reflect our general understanding.

“However, we have reviewed the matter and plan to amend the wording of IHTM25094 so that the final paragraph at 12 above is replaced by the following:

“There has been an increase in the use of LLPs in commercial structures, and sometimes there can be a different outcome for Business Property Relief purposes than that available from a conventional corporate structure.  In the case of an LLP simply taking the place of a holding company, S.267A has the effect of preventing the LLP from benefitting from section 105(4)(b). In cases where the LLP itself also carries on a qualifying business, the business may be regarded as a hybrid, and if the shares in the subsidiary companies are used in the business (rather than being held as investments), then it is possible that the interest in the LLP may qualify for relief if it does not fail the ‘wholly or mainly’ test (IHTM25264). The question of whether an asset is used in the business or held as an investment will be highly fact specific.

“For example, a professional farming partnership might be required to hold a minimum stake within a genetics company in order to get specific semen for their bovine herds, or in a crop company to get the best seed at the best price.

“If this stake is not held as an investment, but with the intention of ensuring that the trade continues and succeeds, then holding such a stake is unlikely to cause any restriction or removal of relief.

“Given the increasing use of partnerships and LLPs in structuring commercial arrangements, we appreciate the anomaly which can arise on the availability of BPR when comparing, say a LLP holding entity to an actual holding company. We have not seen many of these hybrid structures where the holding entity takes the form of an LLP; however it is thought this is a timing difference given the introduction of LLPs in 2000.

“We confirm that s.267A IHTA 1984 relates solely to UK LLPs.

“Although we appreciate that at present there appears to be an anomaly between companies and partnerships/LLPs in this regard, that is what the legislation directs us to and is a result of the drafting of the provisions.”

Tony Wickenden is joint managing director at Technical Connection

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