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It's different in Scotland - Part 3: Partnerships

Author: Farming and Rural Business Community

Published: 09 Sep 2019

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Partnerships remain to be a popular business structure especially within the farming and rural community. When dealing with clients operating on both sides of the Border, it is important to be aware of the differences between partnerships in Scotland and those in the rest of the UK. There is no difference in the tax treatment of partnerships with individual partners being taxed on their share of partnership income and gains.

The Partnership Act 1890 (1890 Act) governs the structure of UK partnerships and defines the persons who have entered into a partnership as a ‘firm’. In England, Wales and Northern Ireland, a partnership is not a separate legal entity from its partners with the partners being jointly and severally liable for partnership debts.

However, for our Scottish counterparts, the 1890 Act recognises that in Scotland a ‘firm’ is a separate legal entity distinct from its partners. A Scottish partnership can, therefore, own assets including property, enter into contracts, take on debt and also grant certain types of security.

Further to the 1890 Act, the Limited Partnership Act 1907 introduced the concept of a limited partnership. The legislation has barely changed since 1907 but limited partnerships continue to be popular business entities.

Similar to a general partnership, a limited partnership is formed by at least two partners. In contrast to a general partnership, a limited partnership consists of two types of partners: a general partner and a limited partner. The general partner is liable for the partnership’s debts and obligations whilst the limited partner’s obligations are limited to its capital contributions. In order for a limited partner to achieve the ‘limited liability’ status, they must not be involved in the management of the limited partnership.

In Scotland, limited partnerships were traditionally used in agricultural tenancy structures until changes to Scottish Land law in 2003. The Agricultural Holdings (Scotland) Act 1949 and its successor, The Agricultural Holdings (Scotland) Act 1991, stipulated that where a farm lease was granted it gave the tenant security of indefinite tenure.

The use of a Scottish limited partnership tenancy for agricultural holdings became commonplace as it provided both the landlord and tenant with the security they sought. The landlord, acting as the limited partner, obtained assurance of being able to bring the lease to an end by the ability to bring the partnership to an end by serving notice. The tenant, the general partner, obtained security of tenure for a period of time.

The main downside for the tenant of recent has been that due to the presence of a limited company in the partnership, they have been unable to claim the Annual Investment Allowance.

The Agricultural (Scotland) Act 2003 introduced Short Limited Tenancies and Limited Duration Tenancies which permits agricultural tenancies to be granted for a finite period with the Landlord being able to obtain vacant possession more readily. According to Scottish Government data, there are still approximately 500 agricultural limited partnerships in operation. In recent years, some well-known Scottish landowners have sought to dissolve Limited Partnership agreements they held with some of their agricultural tenants.

In recent years, the use of Scottish limited partnerships (SLPs) has risen significantly due to its unique trait of being a separate legal entity. Limited partnerships have been used for a variety purposes, including within the venture capital and private equity industries.

The use of SLPs was brought into question in early 2017 by the Business, Energy, and Industrial Strategy (BEIS) due to concerns over the use of limited partnerships (especially SLPs) in international money laundering schemes. One example, was the use of 100 SLPs to move up to $80bn out of Russia. BEIS also reported that just five individuals were responsible for the registration of thousands of SLPs registrations between January 2016 and May 2017.

In light of this, the Persons of Significant Control regime was extended to SLPs in 2017 to ensure transparency in respect of the beneficial ownership of such structures. This change single-handedly led to an 80% reduction in the number of SLPs registered. In 2018, further reforms where announced for all UK Limited Partnerships to improve transparency for these structures including the completion of an annual confirmation statement at Companies House.

Roseanne Bennett
Partner, Greaves West & Ayre


The views expressed are the author’s and not ICAEW’s.

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