Entrepreneurs' relief for partnerships

Entrepreneurs' relief for partnerships
The only provisions for chargeable gains directly applicable to partnerships are found at TCGA 1992, s 59 and TCGA 1992, s 59A. This latter is for LLPs. In both cases the effect is to make the partnership transparent for the purposes of chargeable gains.

Other than in the cases described in TCGA 1992, s 59A(4), all partnerships are transparent for chargeable gains purposes and therefore when looking at entrepreneurs’ relief it is the individual partners' eligibility that must be considered.

Entrepreneurs' relief may be available to a partner on:

·      a material disposal by the partnership, or a material disposal of an interest in the partnership by a partner see here; or

·      an associated disposal see here

Admission of a partner
For the purposes of admitting a partner, the trader is disposing of a share of his business. This constitutes part of a business for the purposes of the legislation as the new partner is purchasing a proportional share of all the assets of the business. TCGA 1992, s169I(8)(a)

However, this assumes that a new partner purchases a share of every asset used in the business and care should be taken to identify the actual assets that are actually being purchased by the new partner. There may be assets included in the accounts which are personal or have such personal use that the sole trader would not include within the partnership. Vehicles are a prime example of such assets. See the Capital allowances for sole traders and partnerships guidance note.

If the partners are connected in any way, you will need to consider whether you can justify the value of goodwill. The value of the business will be subject to arm’s length principles under TCGA 1992, ss 17-18. Otherwise, the value that the new partner is willing to pay can be seen as a reasonable market value. See the Goodwill and other intellectual property (IP) guidance note for more information.

For other considerations regarding the new partnership, see the Admitting a new partner guidance note.

Disposal of a share of the partnership
The disposal by a partner will mean that there is a reduction in the shares of the partner. See the Basic rules for partnership gains. The reduction in the fractional profit share of a partnership is always a qualifying disposal of business assets. HMRC confirmed this at Entrepreneurs' 'relief - practical points

Disposal by the partnership
The disposal by a partnership will mean that there is a disposal without a change in the fractional shares of the partners.

For a disposal by a partnership, there is no change in the profit sharing ratios of the partnership.

Where a partnership owns shares in a trading company, the shares must be for a qualifying trading company. See the Entrepreneurs' relief guidance note for more information.