SDLT – Transfer of property to a corporate partner on partnership dissolution
Property Tax, Stamp Duty Land Tax
A husband (H) and wife (W) were in partnership, through a limited liability partnership (LLP), with a company (Co) which H and W owned in equal shares. LLP was a property investment vehicle. The properties held by LLP were transferred into LLP after October 2003 and SDLT was paid. When LLP was set up and at the time the properties were acquired, H and W’s partnership shares (in both income and capital) were 50% each. Co joined LLP subsequently and gave fair value for the acquisition of a 60% partnership share. The income shares in LLP since Co joined have been 60% to Co, 30% to H and 10% to W. The capital shares have been 33.33% each.
Q: If LLP is dissolved and its property portfolio transferred to Co will there be a charge to SDLT and, if yes, how will that charge be calculated?
A partnership for SDLT purposes includes an LLP. Paragraphs 18 to 24 Schedule 15 FA 2003 apply where a chargeable interest is transferred from a partnership to a person who is or has been one of the partners for his personal benefit. There is a transfer of a chargeable interest from a partnership where a chargeable interest that was partnership property ceases to be partnership property (paragraph 37 Schedule 15). Partnership property is an interest or right in property held by or on behalf of the partnership or the members of the partnership for the purposes of the partnership business (paragraph 34(1) Schedule 15). It is expressly provided in paragraph 18(7) Schedule 15 that property which was partnership property before dissolution or other cessation of a partnership is treated as remaining as partnership property until it is distributed.
Where the chargeable interest in question was transferred to the partnership on or after 20th October 2003 but the transfer was stamped or SDLT was paid, a charge to SDLT will arise only on the proportion of the market value of the property interest transferred on which tax has not previously been paid. This proportion is calculated by a statutory formula (set out in paragraphs 21 and 22 Schedule 15) which takes account of increases or decreases in partnership shares since the property was transferred to partnership.
The chargeable consideration for the transfer of a chargeable interest out of a partnership is:
Market Value (MV) x (100-Sum of Lower Proportions (SLP)%)
Determining SLP Step One: Identify the relevant owner or owners.
A relevant owner is a person who immediately after the transfer of the chargeable interest out of LLP is entitled to a proportion of it and immediately before is a partner or is connected with a partner.
In this case there will be only one relevant owner, Co, as after the transfer of the property out of LLP only Co will have an interest in it.
Determining SLP Step Two: For each relevant owner, identify the corresponding partner or partners.
A person is a corresponding partner in relation to a relevant owner if immediately before the transaction he is a partner and he is either the relevant owner or is an individual connected with the relevant owner.
The provisions of section 839 ICTA (connected persons) apply with the omission of sub-section (3)(c) (trustee connected with a body corporate which is connected with a settlement) and sub-section (4) (partners connected with each other). As H and W (who are connected with each other as spouses (section 839(2) ICTA)) together control Co, they will be individuals connected with Co by reason of section 839(6). In relation to Co (the only relevant owner), the corresponding partners are therefore H, W and Co itself.
Determining SLP Step Three: For each relevant owner, find the proportion of the chargeable interest to which he was entitled immediately after the transfer of the property to the partner. Apportion that proportion between any one or more of the relevant owner’s corresponding partners.
There is no set method of performing this apportionment and it should be carried out to give the most advantageous result (as it is the lower of this apportioned amount and the corresponding partner’s share that will be taken into account – see Determining SLP Step Four).
After the transfer out of LLP the only relevant owner, Co, will be entitled to 100% of the chargeable interest, so, apportion Co’s 100% as follows:
Co 60%, H 30%, W 10%.
Determining SLP Step Four: Find the lower proportion for each person who is a corresponding partner in relation to one or more relevant owners. This includes the proportion attributable to the relevant owner if he is also a corresponding partner.
The lower proportion is the lower of:
• the proportion apportioned under Step Three
• the partnership share attributable to that partner
As the chargeable interest in question was transferred to the partnership after 20th October 2003 and SDLT paid, a charge to tax will arise only on the proportion of the market value of the property interest transferred out of the partnership on which tax has not previously been paid. This proportion is calculated by a statutory formula (paragraphs 21 and 22 Schedule 15) which takes account of increases or decreases in partnership shares since the property was transferred to partnership.
In such a case the partnership share attributable to the partner is determined as follows:
1) Find the actual partnership share for each of the corresponding partners on the relevant date.
2) Add any increase in the corresponding partner’s partnership share which occurred in the period beginning on the day after the relevant date and ending immediately before the transfer of the chargeable interest from the partnership and which ‘count’ for this purpose.
3) Deduct any decrease in the corresponding partner’s partnership share which occurred in the period beginning on the day after the relevant date and ending immediately before the transfer of the chargeable interest from the partnership.
The relevant date where the effective date of the transfer of the relevant chargeable interest to the partnership was on or after 20th October 2003 and SDLT was paid is:
(a) where the corresponding partner was a partner on the effective date, that date; or
(b) where the corresponding partner became a partner after the effective date, the date on which he became a partner.
The relevant chargeable interest is the interest that ceases to be partnership property as a result of the transfer to Co. The ‘relevant date’ will, in the case of Co, be the date on which Co became a partner, and, in the case of H and W, be the date of the transfer of the relevant chargeable interests into LLP.
It is income entitlement (and not capital share) which is used to measure partnership share. Co’s share at the relevant date was 60%.H’s share was 50% and W’s share was 50%. There have been no increases or decreases in partnership shares since Co became a partner. Since the chargeable interests were transferred into LLP H and W’s partnership shares have decreased to 30% and 10% respectively. The result is that partnership share attributable to the corresponding partners is 60% (Co) 30% (H) and 10% (W).
Determining SLP Step Five: Add the lower proportions of each person who is a corresponding partner in relation to one or more relevant owners. The result is the SLP.
The SLP is 100 (60 + 30 + 10). The chargeable consideration on the transfer to Co is therefore nil as MV x (100-SLP)% = Nil.
HMRC accept that where the provisions of section 53 FA 2003 (the market value rule) and paragraph 18 Schedule 15 FA 2003 apply to a transfer of a chargeable interest to a company, the provisions of paragraph 18 take precedence to determine the chargeable consideration (see SDLTM34170).
A: If LLP is dissolved and its property portfolio transferred to Co there will be no SDLT charge.
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At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.