Tax Journal

Holding shares through partnerships: some observations

4 October 2018

The chargeable gains rules, and other tax legislation, do not deal with partnerships very clearly. In examining partnership transactions it can be helpful first to consider the attributes of a partnership under the general law. This is especially the case where transactions involve interests in partnerships, or the introduction of partnerships to corporate group structures. This general law starting point can assist advisers in applying tax legislation more accurately – including where the rules appear to distinguish between holding an ‘interest in shares’ and holding shares outright – and to evaluate HMRC’s guidance on such transactions more critically.

Dominic Foulkes and Jonathan Cooklin (Davis Polk) share their approach to understanding some of the tax issues.

Readers of this journal will frequently encounter partnerships when looking at business organisations and transactions. They may occur to facilitate commercial objectives, such as tax neutral fund vehicles, commercial co-ownership, and carry/incentive vehicles for managers; or for the purposes of non-UK tax planning, as well as for any UK tax attributes which the introduction of a partnership might confer. It is well known that partnerships are ‘transparent’ for the purposes of UK corporation tax on income and gains (see HMRC’s Partnership Manual at PM10700, for example); it is equally obvious that UK tax legislation does not deal with partnerships very comprehensively or satisfactorily.

In this article – which for the most part focuses on the taxation of gains rather than income – we suggest that a more helpful starting point is to set aside the concept of ‘transparency’ for a moment, and begin with the position under the general law. Getting to grips with the strict legal position, even though this may itself be abstract and problematic, can shed insight on the technical and practical implications for analysing certain familiar transactions and legislative expressions, including that of an ‘interest in shares’, which are discussed below.

It should of course be borne in mind that the default legal position may well be affected by the contractual terms of any particular partnership agreement; and, where overseas partnerships are involved, by the salient aspects of relevant non-UK law.

What is a partnership?

The Partnership ...

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