PM132400 - Husbands, wives, civil partners and minors

A spouse or civil partner is sometimes taken into partnership wholly or mainly to maximise the benefit of the tax reliefs that are available.

You cannot challenge the apportionment of profits, as you can a wage, by reference to the value of the partners’ contribution to the firm’s activity. It may be possible in these cases to challenge the spouse or civil partner’s status as a partner, but such a challenge can be difficult to sustain. It is sometimes overlooked that there is no need for the spouse or civil partner to contribute capital; or to participate in management; or, in a trading context at least, to be capable of performing the main activity of the business. Indeed to be a partner one need not take an active part in the business at all. Where the spouse or civil partner has signed a deed declaring an intention to carry on the business and the deed gives a right to share in the profits, and subsequently the accounts of the business show that that person has been allocated a share of the profits, there will not usually be much chance of mounting a successful challenge.

It is worth emphasising that a partnership is not a sham merely because it is set up to save tax, as indeed the spouse or civil partner who is deserted by a partner leaving them to meet the firm’s liabilities may at their own cost. There will always of course be some cases which will be worth investigating and challenging, but these are more likely to be found among those where there is no current partnership deed, and particularly where there is a clear attempt to antedate the setting up of a partnership by more than a few months. HMRC’s BAI (Technical) will be happy to advise on worthwhile cases.

Difficult problems are posed where a taxpayer who is carrying on a profession or vocation (as opposed to a trade), which is dependent on their personal skills or qualifications, purports to take a spouse or civil partner (who does not possess a skill or qualification) into partnership. Some professions have internal rules that preclude this; but this is not always the case. You could argue that in such a case a partnership between the spouses or civil partners to carry on the profession or vocation in question would not be possible, but in the light of the judgments in the case of Newstead v Frost [1980] 53TC525 (in which an entertainer entered into an agreement with a company to exploit his artistic talents, and the court held that there was a valid partnership) that still leaves open the possibility that there might be a partnership between them to exploit the spouse or civil partner’s talents for the benefit of both. The Frost case involved a partnership with a company, but the principle is the same.

Settlements legislation

However, even if it is considered that challenging the existence of a partnership would not be successful, it does not necessarily mean that this is the end of the matter. In certain circumstances the settlements legislation may apply - see TSEM4215.

It should be noted that when higher earners make use of lower earners tax allowances in relation to partnership profits, settlements legislation can take effect. See s619 ITTOIA 2005.

Minor children

Partnerships involving minor children are rare and where found, for example in farming cases, may not have been set up primarily for Income Tax purposes. In law, a person under the age of eighteen may be a partner provided they have the intellectual capacity to understand the nature of the business and the obligations of partnership. The age at which they reach this point will vary according to the individual and the business. In general while under age they are not personally responsible for the debts of the firm.

Under Scottish law, a person under the age of 16 is highly unlikely to be considered to have legal capacity to enter into a partnership, however (Age of Legal Capacity (Scotland) Act 1991, sections 1 and 2).

It is much more likely in these cases that a partnership deed is not in practice being acted upon. See, for example, Dickenson v Gross [1927] 11TC614 in which a farmer entered into partnership agreement with sons but the court held that it was not acted upon and therefore there was no partnership. A common-sense approach is suggested. Given the nature of the business and the age of the child is it reasonable to assume that the child is capable of carrying on the business in common with the other partners? Is it likely that the relationship of agency exists between the child and the others, or that third parties look on the child as a principal? Indeed in the case of a young child is it likely that the child was capable of sufficient understanding to have entered into the relationship at all?

In the case of Alexander Bulloch & Co v CIR [1976] 51TC563 two schoolgirls aged 15 and 16 were claimed to be partners in the family off-licence business. The Court of Session held that the Commissioners were entitled to hold that for the relevant year (during which in any case there was no partnership deed) the essential proof of the existence of a partnership was lacking. It is clear from the stated case that the Commissioners based their decision in part on the immaturity of the children and it is probable that they were also influenced by the nature of the business. On the other hand in the case, for example, of a farming partnership, Commissioners might well be prepared to accept that a 15 or 16 years old person was capable of acting as a partner. BAI (Technical) will be happy to advise on worthwhile cases. Again if it is considered that a partnership involving a minor (that is aged under 18 and unmarried) is artificial and its existence cannot be challenged you must refer it to HMRC Trusts and Estates to determine whether the Settlements legislation can be applied.

Where the child’s share of the partnership was transferred from a parent, the settlements legislation applies to treat the income as that of the donor parent until the child reaches the age of 18, marries or enters into a civil partnership - see TSEM4300 onwards.