The Trust Registration Service (“TRS”) has produced some further guidance on how the requirement to register trusts impacts on partnerships.
In our previous article Farmland & Partnerships: Caught by new trust registration rules we examined how the requirement to register trusts will now impact on farming businesses. The impact on other trust arrangements was covered in our article Trust Registration Service: The new registration requirements
In the first of those articles, we highlighted the common scenario where land is held by some (but not all) of the partners in the business as a partnership asset. We noted that the rules appeared to require registration with the TRS in those circumstances.
The TRS further guidance now states that if property or other assets are purchased by one of the partners, using only partnership monies, and there is no written declaration of trust, there is no requirement to register with the TRS.
This is because sections 20 and 21 of the Partnership Act 1890 (“the 1890 Act”), which apply to all partnerships unless agreed to the contrary, state that property purchased using partnership funds is an asset of the partnership. If reliance is placed on these statutory provisions, the TRS take the view that there is no express trust which needs to be registered with the TRS.
By contrast however, the guidance states that if the parties have entered into a partnership agreement, which states that property purchased by one partner using partnership monies is held on trust for the partners, an express trust is created. In those circumstances the requirement to register would apply.
Section 20 of the 1890 Act is widely drawn and it would also appear to relieve the registration requirement in the following, fairly common, scenario, where the farm is owned by two parents and appears on the balance sheet of the partnership between the two of them. Later on, they decide that their son should become a partner and his name appears on the partnership accounts, but there is no written partnership agreement.
Section 20 states that “all property and rights and interest in property originally brought into the partnership stock….….are called in this Act partnership property and must be held and applied by the partners exclusively for the proposes of the partnership…”
If the intention is that the farm is a partnership asset and it appeared on the balance sheet of the new partnership with son at the outset, section 20 is likely to relieve the parents of the requirement to register that arrangement with the TRS.
Of course, if in that common scenario, the family had signed a written partnership agreement referring to property on trust for the partnership, the TRS guidance suggests that registration is required.
The TRS further guidance does not deal with the other common arrangement, where property is purchased in the names of only some of the partners, using only some partnership monies and there is no partnership agreement.
Until further guidance is given on this point, if the land is held on trust for the partnership, parties should proceed with caution and apply to register with the TRS.
Clearly, if there is a partnership agreement referring to an express trust in that situation, registration with the TRS is required.
The additional registration requirements would seem to be more cumbersome on those businesses, that have partnership agreements in place. This might be used by others as a reason not to enter into such agreements in the future. This is short sighted. Failure to have a partnership agreement in place, which clearly sets out the ownership of assets, is likely to lead to much greater financial implications for the partners, than the cost of the TRS registration fee.
The deadline for compliance is 1 September and although HMRC have indicated they will use a “light tough” in the first few months of administering the new rules, they have the right to charge a penalty of up to £5,000 per matter, so the consequences of non-compliance could be very costly.
For more information please contact: Viv Williams