Partnerships are funny things, in many ways. None more so than for tax, and for CGT in particular.
In regard to CGT, tax law doesn’t have much to say about partnerships other than that a partnership (including, in most cases, an LLP) is treated as ‘transparent’: acquisitions and disposals of partnership assets are, broadly, treated as made by the partners individually. The deficiencies of the legislation in addressing more complex questions (and there are many) are in practice addressed by HMRC’s longstanding Statement of Practice D12 (SP D12).
Readers will recall that CGT was extended in 2015 to cover disposals of UK residential property made by non-residents, and further extended to cover UK non-residential property in April 2019. Perhaps more important even than the charge to tax is the requirement for a non-resident to file a return within 30 days of completion of a relevant disposal, even if no chargeable gain arises.
It’s easy to overlook the fact that the ‘tax-transparency’ of partnerships means that a non-resident partner in a partnership (even one which is otherwise entirely UK-based and which files UK tax returns) is required personally to file a ‘non-resident CGT return’ in respect of relevant disposals made by the partnership.
But it gets worse.
Paragraph 4 of SP D12 provides that ‘an occasion of charge also arises when there is a change in partnership sharing ratios, including changes arising from a partner joining or leaving the partnership. In these circumstances a partner who reduces or gives up his share in partnership surpluses will be treated as disposing of part or the whole of his share in each of the partnership assets…’
In our experience, not all professional advisers are intimately familiar with paragraph 4. However, it doesn’t usually matter. This is because in most cases SP D12 treats the disposal as being made for a consideration based on the value at which the asset is carried in the partnership balance sheet. Thus, where the carrying value is equal to the original cost (as will frequently be the case) the disposal gives rise to neither gain nor loss. So, very often, unfamiliarity with paragraph 4 doesn’t have any tax consequences for UK-resident partners.
However, paragraph 4 took on additional significance when CGT was extended to non-residents (and became even more relevant with its further extension last month). The obligation to file a return applies, as we have said above, whether or not the disposal gives rise to a gain. In principle, therefore, on each and every occasion on which there is a change of profit-sharing ratios involving a non-resident partner in a partnership holding UK land, a ‘non-resident CGT’ return needs to be filed.
Or does it? The ‘non-resident CGT’ code requires a return to be filed where there is a ‘disposal’. Does that include an event that might or might not be a disposal as a matter of law but which, by dint of SP D12, everyone is, in practice, content to treat as one? It’s an argument that some would say has something of a tabula in naufragio ring to it, but it may be worth deploying in any case where HMRC seeks penalties for non-filing in these circumstances.
Better still, just avoid the problem by remembering to file a ‘non-resident CGT’ return in any case where a non-resident partner makes an actual (or deemed) disposal of UK land.
Partnerships are funny things, in many ways. None more so than for tax, and for CGT in particular.
In regard to CGT, tax law doesn’t have much to say about partnerships other than that a partnership (including, in most cases, an LLP) is treated as ‘transparent’: acquisitions and disposals of partnership assets are, broadly, treated as made by the partners individually. The deficiencies of the legislation in addressing more complex questions (and there are many) are in practice addressed by HMRC’s longstanding Statement of Practice D12 (SP D12).
Readers will recall that CGT was extended in 2015 to cover disposals of UK residential property made by non-residents, and further extended to cover UK non-residential property in April 2019. Perhaps more important even than the charge to tax is the requirement for a non-resident to file a return within 30 days of completion of a relevant disposal, even if no chargeable gain arises.
It’s easy to overlook the fact that the ‘tax-transparency’ of partnerships means that a non-resident partner in a partnership (even one which is otherwise entirely UK-based and which files UK tax returns) is required personally to file a ‘non-resident CGT return’ in respect of relevant disposals made by the partnership.
But it gets worse.
Paragraph 4 of SP D12 provides that ‘an occasion of charge also arises when there is a change in partnership sharing ratios, including changes arising from a partner joining or leaving the partnership. In these circumstances a partner who reduces or gives up his share in partnership surpluses will be treated as disposing of part or the whole of his share in each of the partnership assets…’
In our experience, not all professional advisers are intimately familiar with paragraph 4. However, it doesn’t usually matter. This is because in most cases SP D12 treats the disposal as being made for a consideration based on the value at which the asset is carried in the partnership balance sheet. Thus, where the carrying value is equal to the original cost (as will frequently be the case) the disposal gives rise to neither gain nor loss. So, very often, unfamiliarity with paragraph 4 doesn’t have any tax consequences for UK-resident partners.
However, paragraph 4 took on additional significance when CGT was extended to non-residents (and became even more relevant with its further extension last month). The obligation to file a return applies, as we have said above, whether or not the disposal gives rise to a gain. In principle, therefore, on each and every occasion on which there is a change of profit-sharing ratios involving a non-resident partner in a partnership holding UK land, a ‘non-resident CGT’ return needs to be filed.
Or does it? The ‘non-resident CGT’ code requires a return to be filed where there is a ‘disposal’. Does that include an event that might or might not be a disposal as a matter of law but which, by dint of SP D12, everyone is, in practice, content to treat as one? It’s an argument that some would say has something of a tabula in naufragio ring to it, but it may be worth deploying in any case where HMRC seeks penalties for non-filing in these circumstances.
Better still, just avoid the problem by remembering to file a ‘non-resident CGT’ return in any case where a non-resident partner makes an actual (or deemed) disposal of UK land.
