Avoid tax traps when a farm business partnership ends
© David Cole/Rex/Shutterstock Any outgoing partner will be taxed on their share of partnership profits from the last accounting date to the date they cease to be a partner.
Depending on the year-end date of the business, it is possible for profits to have been taxed twice in the early stages of being a partner (and if the accounting date has changed since), but this can be deducted on leaving the partnership, reducing an individual’s final tax bill on their partnership income.
Daren Peacock, PEM See also: Legal considerations when a farm business partnership ends
Normally, a deceased partner’s estate will be entitled to a slice of partnership income until their partnership share is paid out.
The executors will pay income tax on this, which the beneficiaries will receive credit for when they receive the estate income.
On the death or retirement of a partner, the income tax position of any remaining partners should be unaffected, even if technically the old partnership is dissolved and a new one is started.
However, changes to a partnership will cause any existing herd basis election to lapse and provide an opportunity for a fresh election to be made.
The herd basis recognises that a herd or flock of production animals are more like capital assets than trading stock. From a farmer’s point of view, the main benefits are likely to be that the cost of maintaining the herd (for example the cost of replacing the animals) can be charged against tax and that any profit on its eventual disposal will be tax-free.
Partnership cessation tax checklist
- If the partnership is not being dissolved, submit form VAT2 to HMRC notifying of changes to the partnership within 30 days.
- If the partnership is being dissolved, cancel the VAT registration using form VAT7 (or apply to transfer the existing VAT registration to the new partnership using form VAT68 where appropriate).
- Register any new partnership for VAT using form VAT1.
- Outgoing partners must inform HMRC they have left the partnership and (if the case) are no longer self-employed. This can be done online
- Next of kin or a personal representative must notify HMRC if a partner has died (a ‘Tell Us Once’ service is available online to report a death to most government departments in one go online).
- If the partnership is being dissolved, consider whether any new partnership can take over the existing PAYE scheme.
Capital gains tax (CGT)
Care should be taken if parts of the farm owned by the partnership are distributed to an outgoing partner.
The default position for CGT is that the ongoing partners will be treated as disposing of their respective shares in the partnership at market value. Holdover, partition (where an asset such as a piece of land is jointly owned) and rollover reliefs may be available to reduce or eliminate CGT liability.
An outgoing partner will give up his interest in the remaining partnership assets – this is treated as a disposal for CGT purposes and could trigger a tax bill, although careful planning may allow a claim for entrepreneurs relief resulting in a 10% tax bill.
There is no CGT payable on the death of a partner.
Inheritance tax (IHT)
A partner leaving a partnership will lose entitlement to agricultural property relief (APR) or business property relief (BPR) on the conversion of his partnership interest into cash (or a debt) due from the partnership.
These reliefs can be reinstated if the cash is rolled over into qualifying replacement property within three years.
On the death of a partner, the value of his interest in the farming partnership is usually protected by APR and/or BPR.
Providing certain conditions are met, APR and/or BPR may continue for the successor.
However, partnership agreements should be reviewed as APR/BPR is lost if the surviving partners are obliged to buy the deceased’s share rather than simply having the option to do so. The obligation tends to feature in older partnership agreements.
Stamp duty land tax
The distribution of land when a partnership ends could create an SDLT liability for the partner who receives it.
However, it is important to be clear on whether the land was actually a partnership asset, as this will affect how it is treated for SDLT purposes.
VAT
If a partnership continues with fewer partners, the VAT registration will be unaffected. However, it is important to tell HMRC when a partner leaves as they will otherwise remain joint and severally liable for the VAT debts.
VAT may be due on the value of any partnership assets given to the exiting partner – for example, machinery.
If a partnership completely breaks up, it will need to deregister from VAT. It should be possible to transfer all (or part) of the farming business to a new entity (which may or may not involve one or more partners of the original partnership) as a transfer of a going concern.
The new entity has the option of taking the partnership’s VAT registration number.
If assets remain undistributed at the time of deregistration, there may be a VAT charge on the market value of the assets on hand.