Annuity to ex-partner - business incorporating

Partnership pays annuity to retired partner; partners wish to incorporate; is there still tax relief

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A professional partnership pays an annuity to a retired partner.  The payment is disallowed in the partnership tax comp and the partners claim relief in thier own tax returns under S448 ITA 2007, in proportion to their partnership profit shares. The annuity is within S900 ITA 2007: it is a qualifying annual payment made by individuals for genuine commercial reasons in connection with the individuals' profession. Thus S448 relief is due. 

The partners wish to incorporate the business.  In the company, the annuity would not be a deductible expense, as it is capital in nature, as part of the price for the acquisition of the business. (In the case of Parnalls Solicitors a lump sum payment to replace the obligation to pay an annuity to a former partner of the unincorporated business was disallowed onthe grounds that it was capital becuase the annuity would have been capital.)  The intention is that the current partners will continue to pay the annuity, and it will not become a company liability. My reference material (CCH) states that the annuity payments will only fall within S900 while the current partners remain in business. On incorporation they will cease to be in business on their own account, and CCH states that the future annuity payments will fall outside S900, so no S448 relief will be available. However CCH does not explain why this is so, and the HMRC manuals do not touch on this point.  My view is that as the obligation to pay the annuity has been incurred in connection with the business, the cessation of that business will not change that, and the payments will still fall within S900 so S448 relief will still be available.  

Income tax is famously an annual tax, but does that matter?  

There was a VAT case where a business entered into a lease, with VAT on the rent.  The business closed down and the proprietor still had to pay the retn.  He successfuly reclaimed his input tax on the grounds that the link between the input tax on post-cessation rent payments still related to the taxable business, even though it was defunct. But of course that is VAT law so maybe no help.  

Has anyone come across this, and is there any way the current partners will be able to get relief after incorporation? 

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