Partnership transfers on death and capital gains tax

Generally, when a person dies leaving assets, their beneficiaries will benefit from a market value uplift for capital gains tax purposes. This is because of a rule stating that assets which a deceased person was competent to dispose of are deemed to have been acquired on his or her death for a consideration equal to their market value at the date of death.


Dan inherits an investment property worth £500,000 from his father. When he sells the property two years later for £550,000, he only needs to pay tax on a gain of £50,000. This is the case irrespective of the inheritance tax (IHT) position. For example, there could have been no IHT liability if Dan’s father had had a £650,000 nil rate band allowance due to taking on the £325,000 allowance of his late wife.

This default position is not always the case when partnerships are involved. Although the position is clear when shares in a partnership are left in a will (the market value rule above should apply), the position when partnership assets pass under the partnership agreement is not so straightforward. Many partnership agreements provide that, on death, the deceased’s interest in the partnership automatically passes to the remaining partners, so the share cannot be disposed of in a will. This means that the above market value rule cannot apply in these cases.

Partnership agreements and SP D12

If the interest passes through a partnership agreement, then we have to look to Statement of Practice D12 (SP D12) which explains how certain partnership situations should be dealt with. Under SP D12, where partnership assets pass to other partners for no consideration and there has been no previous revaluation of the assets then the original base cost of the asset is reallocated to the remaining partners and there is no disposal for capital gains tax purposes. This means that partners who ‘inherit’ on death via a partnership agreement will not benefit from a capital gains tax uplift.

Forbes Dawson view

We think that it may be possible to challenge this strict technical position when it is in point and perhaps some concessionary treatment could be sought from HMRC. This seems particularly unfair in cases where inheritance tax is due on the assets (with no availability of business property relief), perhaps in the case of a property investment partnership. However, in many cases the issue can be avoided by ensuring that partnership interests are transferred on death through a will. I know that there are times when it is perceived to be advantageous to set up partnership agreements in family situations (for example property partnerships can have stamp duty land tax advantages). People who do this should take care that they do not include an innocent-looking ‘death clause’ which could end up being a tax sting in the tail for future beneficiaries.




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