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A partnership is a partner in another partnership

A sole trader partner in a partnership is forming a partnership instead to receive the same profits

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I have a sole trader client who is a 10% partner in a partnership. The sole trader is forming a partnership of his own and that partnership is to replace the sole trader partnership such that the 10% profit share is paid into the new partnership instead of to the sole trader as was.

I am sorry that this might be an odd question but I do not know the answer and so wondered what is the method by which HMRC are advised that the UTR number for the sole trader as a partner is being replaced by the UTR of the new partnership. Are there any special forms to complete or is it a case of simply informing HMRC and then ensuring that the partnership tax return records the profit share attributable to the partnership UTR instead of the sole trader UTR?

This will be a 6th April change so no mid year change will be necessary.

Thank you      

Replies (14)

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By johngroganjga
16th Mar 2017 10:55

It may be possible in Scotland, where I understand that a partnership is a legal person, but I think that the plan fails in England and Wales. But why not just introduce the new partners into the main partnership as individuals, and the adjust the profit sharing to achieve the same result? Much easier that way surely.

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Replying to johngroganjga:
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By davebrown123
16th Mar 2017 11:52

Thank you for that and I see what you mean and I will explore that. I suppose that this depends on whether the existing partners would permit that.
Thank you

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By Tim Vane
16th Mar 2017 11:00

I assume this is a scottish partnership.

You notify the change in the same way as you would any other change in partner. Just complete the tax return with the partner details and UTRs.

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Replying to Tim Vane:
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By davebrown123
16th Mar 2017 11:42

Hi, no its not a Scottish partnership

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Replying to davebrown123:
By Tim Vane
16th Mar 2017 15:23

If it's not a scottish partnership then it cannot be a partner in another partnership. Instead the wife will need to be added as a partner in her own right, after agreement with the other partners.

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By Accountant A
16th Mar 2017 11:01

When you say "The sole trader is forming a partnership of his own" do you mean he is taking on a partner?

Also confused at reference to "the sole trader partnership".

Do you know what the plan is intended to achieve?

Is the individual deemed to dispose of his partnership interest and his new partnership deemed to acquire it? Presumably the 'main' partnership partners are agreeable to the plan?

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Replying to Accountant A:
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By davebrown123
16th Mar 2017 11:50

Apologies for misleading you, yes the sole trader is taking on a partner who is his wife who will be performing some administration for the new partnership. She will receive a profit share thus taking some profits away from the original sole trader who is being taxed at 45%. The wife has no other income at the moment. Your final question is exactly what is happening hence my question as to how are HMRC advised of this? There are other "partners" in the main partnership that are Limited Companies apparently so presumably there is a mechanism for letting HMRC know that but i do not know what it is.

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Replying to davebrown123:
Stepurhan
By stepurhan
16th Mar 2017 12:06

davebrown123 wrote:
There are other "partners" in the main partnership that are Limited Companies apparently so presumably there is a mechanism for letting HMRC know that but i do not know what it is.

Limited companies are separate legal entities for both legal and tax purposes. As noted above, under English law, partnerships are not separate for tax purposes.

You cannot apply a mechanism relevant to one entity to an entirely different one.

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Replying to stepurhan:
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By davebrown123
16th Mar 2017 12:14

OK, so in summary a "partnership" cannot be a partner in another partnership because it is not a legal entity but a Limited Company can because it is a separate legal entity.
Many thanks to all.

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Stepurhan
By stepurhan
16th Mar 2017 12:04

What do the other partners say to this?

You're still altering the partnership structure however you go about this. Why should the others accept any change that potentially complicates life for them but only benefits your client?

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Replying to stepurhan:
By johngroganjga
16th Mar 2017 13:27

stepurhan wrote:

What do the other partners say to this?

You're still altering the partnership structure however you go about this. Why should the others accept any change that potentially complicates life for them but only benefits your client?

A one-0ff administrative nuisance certainly, but at no financial cost to them at all. Future profits and drawings not affected by one penny.

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Replying to johngroganjga:
Stepurhan
By stepurhan
16th Mar 2017 14:06

johngroganjga wrote:

A one-0ff administrative nuisance certainly, but at no financial cost to them at all. Future profits and drawings not affected by one penny.


A one-off nuisance? Possibly.

But you now have another person who has a direct interest in partnership affairs. As such, they arguably have a right to attend partnership meetings and have their say on what they think the partnership is doing. For that matter, isn't the work the wife does effectively for the main partnership. After all, her income would solely be based on the partnership doing well. If it is alleged that her involvement has improved the partnership's profits overall, would that not justify her calling for a change in the profit shares?

The chances are that the wife won't actually have an appreciable impact. But why should the other partners even open themselves up to the possibility if there is no benefit to them?

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By Dick Stastey
16th Mar 2017 13:10

For completeness, what has not been mentioned is that whilst an LLP is taxed as a partnership, it does have a legal personality of its own, meaning that an LLP can be a member of another LLP or a partner in a partnership.

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By mabzden
16th Mar 2017 15:56

Going off at a small tangent, you may want to encourage your client to keep his tax affairs reasonably simple.

If nothing else, good luck explaining this structure to a mortgage broker or bank.

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