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Tony Wickenden: Unquoted shares held by partnerships don’t qualify for BPR

HMRC has stated that unquoted shares that would qualify for business property relief if held directly are unable to qualify if held in a partnership.

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Last week I looked at the issues surrounding the impact on IHT business property relief that large cash balances held in businesses could have.

The ICAEW argued that there could be some relaxation in the rules on “excepted assets” causing a diminution in relief where businesses were holding exceptionally large cash balances due to concern over the fragility of the economic recovery and the potential future need for cash. HMRC was unable to agree to any concession on this.

At the same time as publishing the outcome to this question, the ICAEW also published its correspondence with HMRC on the availability of BPR on an interest in a partnership/limited liability partnership that holds shares in a company, where relief would be available if those shares were held directly by an individual.

It would appear that in these circumstances BPR would not be available and the challenge to HMRC was that the original BPR provisions did not anticipate the introduction of the Limited Liability Partnership Act in 2000 or the increased use of partnership/LLP entities commercially since the changes to the IHT regime in Finance Act 2006.

In considering this I will draw substantially on the excellently clear paper on this subject published by the ICAEW.

The central issue that the ICAEW sought to determine was how the IHT BPR rules apply in relation to partnerships/LLPs which own shares in an unquoted trading company. In order to establish that, the Institute first looked at the legal differences between partnerships and LLPs in relation to IHT.

A general partnership under English law is treated as opaque for IHT purposes but is transparent for income tax and capital gains tax purposes. Under section 267A IHTA 1984, LLPs are treated as general partnerships in this regard and would therefore appear to receive the same opaque IHT treatment.

When assessing the availability of BPR, it is necessary to decide whether to look solely at the level of the business activity in the partnership/LLP (treating it as opaque for IHT purposes) or whether to look through to the underlying asset and assess whether BPR would be available on the shares in the trading company that were held by the partnership or LLP as if they were held directly by an individual.

Unfortunately, the relevant HMRC manuals appear to indicate that BPR would not be available where unquoted trading company shares are held by a partnership/LLP which would otherwise qualify for relief if held directly. Specifically referring to LLPs, HMRC manuals at IHTM 25094 state:

“An interest in a 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 (TG) 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.”

The manuals set out here an apparent contradiction between viewing the partnership/LLP as transparent for, say, IHT valuation purposes, and looking at the level of their business when considering BPR for an interest in a partnership/LLP.

The HMRC manuals seem to indicate that if, for instance, the sole or main activity of a partnership/LLP is holding shares in unquoted trading companies (which would qualify for BPR if held directly), then no BPR is available as the business is wholly or mainly one of holding investments.

In relation to LLPs, in this context, section 267A IHTA 1984 states:

“For the purposes of this Act and any other enactments relating to inheritance tax –

(a)       property to which a limited liability partnership is entitled, or which it occupies or uses, shall be treated as property to which its members are entitled, or which they occupy or use, as partners,

(b)       any business carried on by a limited liability partnership shall be treated as carried on in partnership by its members.”

The important words here in (a) appear to be “as partners.” If the property is treated as held “as partners” then no relief will apply because a general partnership is not transparent for IHT purposes – the asset for IHT purposes is a chose in action (the partnership interest), not a direct interest in any of the assets held by the partnership.

The general intention of section 267A IHTA 1984 would appear to be to treat LLPs as though they were general partnerships for IHT purposes, and the wording of the section would seem to be sufficiently clear to achieve this. This would then seem to have the effect of limiting the transparency of the arrangement for BPR purposes.

As well as looking for clarity on this issue the ICAEW also sought confirmation that section 267A IHTA 1984 relates solely to UK LLPs.

I will continue this story next week.

Tony Wickenden is joint managing director at Technical Connection

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