A husband/wife partnership propose to introduce an employee as a partner. A reduced profit share in these circumstances normally constitutes a disposal for CGT purposes. Am I correct to assume that business gift/holdover relief can be used to defer the gain? Suppose the new partner is entitled to a future profit share but not a share of the existing capital of the business - does this mean that a CGT position does not arise as a consequence of the partnership change?
Replies (44)
Please login or register to join the discussion.
What is currently in the balance sheet that is being disposed off?
Is revaluation of the balance sheet taking place?
Are there issues re a transfer to an employee?
Is there any consideration?
https://www.gov.uk/government/publications/partnerships-and-capital-gain...
"Point to remember
Transfers of interests between partners take place at balance sheet value unless actual consideration is paid."
The new partner could do with a bit of legal advice.
He has no entitlement to the assets yet is liable for partnership debts.
I would not be accepting this deal and I would be advising the existing partners to insist that the employee takes proper advice before signing up.
It's a bad deal.
Why not just pay him a bonus based on the firm's profits ?
If I were the HMRC officer, I'd raise an eyebrow at the suggestion that it was a gift, as I would at the proposal that the new partner was a partner given that it was asserted that he had no share in the assets and a 0% share of profits.
Never mind the tax position for the time being - look first at the credibilty of the deal.
What does the employee think ? Is he likely to be sucker enough to accept the deal offered ?
There may be no payment but that doesn't mean that there's no consideration.
I believe you mentioned 0% at some point, so I'm slightly fogged by your response here. If you meant that he'd had no profits at the point of transfer, I would suggest that that is always the case for a new partner. What he is receiving is the expectation of future profits.
The bottom line is that I'm not convinced that he is a partner.
Eh ?
At the end of the day, if it's not been converted into cash or transferred to someone, it has no value.
So I repeat my first post,
"Point to remember
Transfers of interests between partners take place at balance sheet value unless actual consideration is paid."
So is there any balance sheet value re goodwill here?
Also see worked example:
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg27640
And in general:
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg27600p
No - there's no goodwill in the balance sheet.
I can't assess any gain yet as the revised partnership shares are not yet decided. My input for now was just to warn the current partners that a CGT position might arise from the introduction of a new partner. I hoped to be able to say that Holdover Relief might save the day.
How much is this goodwill likely to be worth ?
I'm fogged here - because did you not say that the new partner is to have no right to assets ? So how can there be any transfer of goodwill ? Or any other asset for that matter.
Why do you think there is an assessable chargeable gain on goodwill when there is no goodwill asset recognition within the partnership accounts nor consideration paid by the new partner to the existing partners?
You really ought to look at the example I linked to from HMRC.
If old partners want to recognise existing goodwill valuation in the accounts, Dr Goodwill, Cr capital accounts, there is a different answer, but as you appear to be describing matters I am struggling to spot either existing partner having a chargeable gain vis a vis goodwill.
Why do you think there is a gain?
Gifts to employees (which is what you are in essence suggesting - I think) may have other implications.... such as (as Lion intimated) they tend not to be gifts.
No.
Is the new partner the daughter, perhaps? If so, and if you think that relevant to the answer, why do you not disclose the relationship in the question?
There's still the question of whether it constitutes part of the employee's remuneration deal.
any reading...?
TCGA, s17(1)(b). SP D12 (again!) – paras 7 and 8. And the commentary at the links DJKL gave you.
In the normal course of commercial transactions, an incoming partner might buy in to the partnership. If you have a situation where there is an element of 'gift', I would wonder why that was. If it's a daughter, s18 invokes s17. If it's an employee, then is the 'gift' remunerative?
We all seem a bit fogged about what you're asking, because you haven't answered the "why?"
But to answer the s17 question... partnerships are transparent for CGT and an incoming partner may get a share of every partnership asset. S17 would, presumably, apply to every asset or to none of them. (But so what? S17 is no more than a bit of tax fakery. If something isn't chargeable to CGT, it doesn't matter what the deemed consideration is.)
With an employee, I think it's going to be hard to argue that the 'award' of the goodwill is not a reward for services.
If it is a reward (you persist in not disputing that) then I think a) s17 applies b) there's no holdover relief, because there is actual consideration - albeit not cash - and c) it's taxable on the employee - like any other reward, it's earnings.
I'd just add... I know I picked out paras 7 and 8 before, but do read all of SP D12.
And make sure it's the latest version.
With an employee, I think it's going to be hard to argue that the 'award' of the goodwill is not a reward for services.
If it is a reward (you persist in not disputing that) then I think a) s17 applies b) there's no holdover relief, because there is actual consideration - albeit not cash - and c) it's taxable on the employee - like any other reward, it's earnings.
Great summary of the issues.
I'm confused now. You say s17 applies. That is capital gains legislation. But you conclude that the matter would be taxed as earnings.
CGT for the existing partners.
Income Tax for the new one.
CGT for the existing partners.
Income Tax for the new one.
There is after all a disposal AND an acquisition…
It might fail to get there, but the tax system is aiming for the position that might have arisen had cash been moving around – a cash bonus taxed as employment income and cash being used to buy the goodwill.
If there is no disposal to tax and no acquisition to tax, then do you really need us to tell you there's no tax?
That said, I question your thesis. Is goodwill part of "the capital of the business"?
But supposing the partnership agreement specified that the new partner is entitled to x% of future profits but 0% of the capital of the business pertaining at the date of his appointment. Doesn't this result in nothing being taxable as a consequence of the partnership change?
You say that goodwill isn't currently on the business accounts. So I infer that "the capital of the business" represents undrawn profits, together with sums advanced by the partners - but nothing for goodwill.
I wouldn't fancy your chances at a Tribunal.
If the new partner cannot share in any capital proceeds, including for the sale of goodwill, then I can see the OP's point. I would get a solicitor involved with the drafting of the agreements (and advising on what is and is not possible) rather than just changing the odd word here and there :-)
Getting legal input may help to focus minds on the real issues.
Happen as may be, Drags, but, for me, the problem is the more restrictions are placed on the new partner's participation, the less he looks like a genuine partner.
He's looking a lot more like an employee whose remuneration is set by a percentage of the business profits.
Doubtless one of the things that talking with the legal type might focus minds on is what happens when the pie is smaller - or, Heaven forfend, negative. Minimum wage and all that.
If this new partner is genuinely unconnected, I'd consider incorporating.
For commercial reasons.