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Liability Of Expense Due To Exiting A Partnership

Question

Six brothers are in partnership in a portfolio of various properties. One of the brothers would like to exit. He would exit by taking his equal share in the form of properties. This would incur capital tax gain payments to the tax authorities and transfer and stamp duty payments. 

From a Shari point of view who would be liable for capital tax payments and transfer and stamp duty costs, would it be the buyer (The brother exiting) or the sellers (The 5 brothers who now own the portfolio less the 6th brother)?

Answer

In the queried scenario, according to our understanding capital gains tax is charged to the company that accrued the properties, and not on the individual that intends transferring the properties onto his name. However, all six partners have benefitted from the increase of value in the property prices; hence the capital tax payment will be charged to all the six members of the company according to their shareholding in the company including the brother that is now exiting. For example, a property was purchased by the company 20 years ago for R1 million Rands and is now valued at R4 million. 

This means that there was an increase of R3 million in the property, so each member (of the 6) will be required to pay capital gains tax on his R500 000.00 increase. 

However, all transfer related costs will be solely for the exiting brother’s account and not for the company’s account. If the stamp duty charge is related to transfer costs then this too will be upon the exiting brother.

Checked and Approved By:

Mufti Muhammed Saeed Motara Saheb D.B.

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