Can inheritance tax be reduced by transferring property to a limited liability partnership? BKL tax adviser Terry Jordan responds to a reader’s query in Taxation magazine.
My clients are a husband and wife who own a substantial property portfolio and would like to carry out some inheritance tax planning.
A possible strategy has been suggested but it has resulted in an argument between tax practitioners. The couple have been advised to set up a limited liability partnership (LLP) into which they would transfer their properties. According to FA 2003, s 65 and as set out in HMRC’s Stamp Duty Land Tax Manual at SDLTM24500, this transfer should be free of stamp duty land tax.
Under ITTOIA 2005, s 863(1)(c) – see HMRC’s Business Income Manual at BIM82115 – ‘the property of the LLP is treated as held by the members of the LLP’. Thus, the transfers into the LLP should not trigger capital gains tax because the assets have not changed ownership. So far, all this is straightforward.
Then, the theory goes, the LLP will write an IOU to the husband and wife for the value of the property portfolio. The husband and wife then transfer (or assign) the IOU to their children and hope to live for seven years afterwards – or happily ever after!
However, a second opinion says the idea of writing an IOU is ludicrous. The value of the portfolio is credited to the capital accounts of the partners and a person cannot write an IOU to themself.
Finally, would it make a difference if the transfers were to a Scottish partnership, which in some respects is, I understand, treated as a separate entity?
I welcome any advice from readers.
Query 19,151– Lippy.
Reply by Terry ‘Lacuna’ Jordan BKL
It is implicit in Lippy’s query that his clients’ substantial property portfolio is held by a partnership. Otherwise, the relief on incorporation under FA 2003, s 65 would not be available.
It is then proposed that the LLP should write an IOU to the husband and wife for the value of the property portfolio. The clients would assign the IOU to their children and it is envisaged that such assignments would constitute potentially exempt transfers that would fall off the parents’ inheritance tax ‘clocks’ after the normal seven-year period.
The proposal has some similarities with the ‘two-trust’ arrangements that were popular before the transition from stamp duty to stamp duty land tax on 1 December 2003. Typically, property was sold to Trust 1 in which the original owners enjoyed a life interest and the IOU was gifted to Trust 2, which was usually interest in possession for adult children or sometimes accumulation and maintenance (A&M) for the benefit of grandchildren.
After the income tax charge on pre-owned assets (POAT) was introduced from April 2005, counsel have suggested a more straightforward scheme whereby one spouse sells a property to the other (thereby incurring stamp duty land tax) and the IOU is gifted to younger generations.
In the present case, I side with the second opinion that writing an IOU is ludicrous; it would surely have to be given in exchange for something.
The Inheritance Tax Avoidance Schemes (Prescribed Description of Arrangements) Regulations 2017 (SI 1172/2017) took effect on 1 April this year and would have to be considered if the scheme is to be pursued. Condition 1(c) might well be in point and Condition 2 requiring contrived or abnormal steps would apparently also be relevant.
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