SDLT partnership rules

Special SDLT provisions govern the SDLT treatment of land transferring into, or out of, a partnership, to a partner or someone connected to a partner. The rules, which can be complex, apply a formula to determine what percentage of the market value of the property being transferred is subject to SDLT. In very broad terms, the aim of the formula is to give credit for the interest in the property that, indirectly through the partnership, each partner (or an individual connected with them) has.

In addition, there are also special rules that apply to the transfer of an interest in a “property investment partnership”. This is based on percentage of the market value of the underlying properties owned by the partnership that equates to the interest in the partnership being acquired. A property investment partnership is defined, for SDLT purposes, as a partnership that’s main business is investing in or dealing in chargeable interests in land (whether or not involving construction operations).

We use some scenarios below to demonstrate the potential impact of the SDLT partnership rules.

Example: background facts

Apples Farming Partnership comprises of four partners, Joe, Megan, Lucy and James (the partners), who each have a 25% income share of the partnership (the partnership). For the purposes of this article Joe, Megan, Lucy and James are connected for the purposes of the Corporation Tax Act 2010.

The partnership operates a farming business and owns freehold commercial farmland and buildings worth £5m (the property) features throughout these examples.

Example: transferring the property into the partnership

In this example, Joe, Megan, Lucy and James currently own the property in their personal capacity. They have just established the partnership to run their business endeavours, and they have agreed to introduce the property to the partnership as it is central to operations.

As the current owners of the property are also partners in the partnership, the special partnership provisions contained in Schedule 15 of the Finance Act 2003 (the SDLT partnership rules) will apply to calculate the SDLT liability.

The starting position is that the partnership’s SDLT liability will be calculated based on the full market value of the property at the date of transfer. As the property is commercial, the liability would be £239,500. However, as the transferors are all partners in the transferee partnership, and all connected to each other, the SDLT partnership rules will apply to reduce the chargeable consideration from £5m to nil. The result of this is that no SDLT is payable and no SDLT return is required.

Alternatively, if one partner was unconnected to the other three (who remain connected to each other), the chargeable consideration would be reduced to £1,250,000 (i.e. 25% of the market value of the land in line with the unconnected partner’s income share). This would result in a £52,000 SDLT liability and the need to submit an SDLT return. It is therefore vital to ensure that the connected parties’ position is properly assessed. It is often relatively straightforward but can become very complicated with some unexpected results.

Example: transferring the property out of the partnership

In this example, the partnership has owned the property for ten years and the partners have received advice that the property would best be held in a private limited company. The partners have therefore instructed their solicitors to incorporate Apples Farming Limited (the company) at Companies House, with the intention of transferring the property accordingly. The partners have agreed that they will own shares in the company in the same proportion as their income shares in the partnership (i.e. 25% each).

Again, the starting position is that the company’s SDLT liability will be calculated based on the full market value of the property at the date of transfer (as it is connected to the partnership via its shareholders). As the property is wholly commercial, the liability would be £239,500, as above. However, if, as we assume for these purposes, all the partners in the partnership are connected to each other, and, in addition, connected to the company, the SDLT partnership rules should apply to reduce the chargeable consideration from £5m to nil. The result of this is that no SDLT is payable, and no SDLT return is required.

If, for example, the company sought external investment with the result being that the partners only held 25% of its share capital at the time the property was transferred, it is likely that none of the partners would be connected to the company, and the company would therefore suffer an SDLT charge based on the full market value of the property. Understanding the potential connection between the parties is therefore really important to determine.

Example: transferring income shares in the partnership

For the purposes of this example the partnership is a property investment partnership, rather than a farming partnership.

Joe decides to retire and sells his 25% of the income shares in the partnership to Megan. In this situation, in very broad terms, an SDLT liability would crystallise for Megan based on proportion of the market value of the relevant partnership property that equates to the interest in the partnership that she is acquiring. For this example, we will assume that the only relevant partnership property of the partnership is the property. Broadly, the chargeable consideration Megan’s SDLT liability will therefore be calculated based on £5,000,000 x 25% = £1,250,000. This is a very simplified example and the potential SDLT treatment will depend on several factors. Expert advice should therefore be sought when transferring interests in partnerships that hold property. 

Conclusion

The case studies above are designed to demonstrate how the special SDLT partnership rules work in broad terms. However, it is important that a proper review is undertaken in most cases as slight changes in facts can impact the SDLT liability.  

As demonstrated above, the SDLT partnership rules can, if the facts permit, allow a property to be transferred from a partnership into a company without triggering an SDLT charge. This is obviously greatly beneficial in the absence of any specific incorporation relief,; however, care should be taken as anti-avoidance rules can apply to thwart this treatment.