HMRC SDLT: SDLTM09390 – Example 2 – partnership transfer
Partnership Transfer Principles and Concepts
This section of the HMRC internal manual provides guidance on partnership transfers, focusing on the transfer of assets within a partnership. It outlines the tax implications and procedural steps involved.
- Explains the process of transferring assets within a partnership.
- Discusses tax implications for both the partnership and individual partners.
- Provides examples to illustrate the application of rules.
- Guides on compliance with HMRC regulations during transfers.
Read the original guidance here:
HMRC SDLT: SDLTM09390 – Example 2 – partnership transfer
Partnership Transfer: SDLTM09390 – Example 2
Background Information
Nina, Ophelia, and Penny are friends who have been running a property letting business together as a partnership for many years. To lower their personal risks while continuing their business, they decide to incorporate it.
Incorporation Process
– The three partners purchase shares in an existing company, commonly referred to as an ‘off the shelf’ company.
– They then transfer the ownership of the properties they were letting from their partnership into the new company.
Understanding Relevant Legislation
When it comes to Stamp Duty Land Tax (SDLT) and the transfer of property, specific rules apply under the legislation. The key sections to consider in this case are Section 75A and Section 75C from the Finance Act.
Application of Section 75A
– Section 75A generally covers transfers of property interests between partners and partnerships.
– In this scenario, Section 75A does not apply. The reason is that the initial transaction involved buying shares in the company, not a direct transfer of property.
Role of Section 75C(1)
– Because the first transaction revolves around shares, Section 75C(1) comes into play.
– This section states that if the transaction is concerning shares, then we will ignore the provisions of Section 75A for tax assessment purposes.
Property Transfer Explained
After the partners have completed the purchase of the shares, the next step involves transferring the properties.
– This transfer signifies that the properties are being moved from the original partnership to the new company formed by Nina, Ophelia, and Penny.
– It is crucial to note that while the ownership of the properties is changing, the main focus at this stage is on the company they have created.
Special Provisions Under Schedule 15
– Since Section 75A does not apply to this situation, we must use provisions outlined in Schedule 15 to determine any chargeable consideration for SDLT.
– The special partnership provisions will guide the calculation process for SDLT. This means that different rules might be applied to how the tax is computed compared to a straightforward property transaction.
Key Points to Remember
– The ownership of the letting business changes from a partnership to a limited company, but this does not trigger SDLT under Section 75A.
– The transaction involves share transfer, therefore using Section 75C(1) allows the partners to bypass certain shared partnership tax rules.
– Always rely on Schedule 15 provisions for calculating SDLT when a partnership transfers property to a newly formed company.
Example Application
Let’s illustrate with a practical example:
– Nina, Ophelia, and Penny, as equal partners, may each own a third of the partnership, which includes three properties valued at £300,000, £400,000, and £500,000.
– When they buy shares in the new company, they effectively become shareholders, not direct owners of the properties anymore.
– As a result, Nina, Ophelia, and Penny no longer deal with individual property ownership, but instead, their interests are now part of the company structure as shareholders.
Tax Considerations
– At the moment of the share purchase and property transfer, there is no SDLT due under Section 75A.
– Instead, the focus should be on assessing any SDLT that could arise due to the company owning the properties.
– Schedule 15 dictates that the tax treatment will depend on the overall property valuation and how the partnership’s assets are recorded under the new company structure.
Implications for the Partners
– The partners should seek advice to ensure they can fully understand the implications of their actions concerning SDLT.
– Proper accounting practices must be adopted when transferring asset values from the partnership to the company.
– It is essential to document the transaction steps carefully to adhere to tax requirements and avoid any future tax issues.
Final Notes
When dealing with the incorporation of a property letting partnership, frequent references to tax legislation are paramount to ensure proper compliance.
By transferring properties in accordance with the specified sections and provisions, partners can effectively navigate the complexities surrounding SDLT and their new business structure.
For additional guidance on SDLT matters, you can refer to the official HMRC resources, which provide comprehensive information on stamp duty regulations and examples similar to the scenario presented here.
Visit Stamp Duty Advice Bureau for further advice and detailed examples related to property transactions and SDLT calculations.