Read the original guidance here:
HMRC SDLT: SDLTM34060 – Election by property investment partnership to dis-apply, Para 10 – Para 12A

SDLTM34060 – Election by Property Investment Partnership to Dis-Apply

Understanding the Election under Para 10

When a property is transferred to a partnership, such as when a partner hands over some of their ownership, specific rules apply to understand how much tax must be paid. This is referred to as chargeable consideration, and the special rules are set out in Paragraph 10 (Para10).

If the partnership that receives the property meets the definition of a property investment partnership (found in Paragraph 14(8)), it has the option to elect for Para10 not to apply.

Effects of Making the Election

When the property investment partnership makes this election:

– The transaction will no longer fall under Part 3, which deals with transactions that have unique requirements.
– Instead, the chargeable consideration for the transaction is the market value of the property that is transferred.

If the election is made, Paragraph 18 also does not apply. Paragraph 18 would only come into play if the property interest was moving from one partnership to another.

How to Make the Election

To use this election, it must be included in the land transaction return associated with that property transfer. If you are amending a previous return, the election can be included there as well. Once made, this election cannot be changed or taken back later.

The election needs to be submitted via a letter, addressed to the Technical & Guidance Team at HMRC.

Amending the Land Transaction Return

If you make an election while amending a land transaction return regarding a specific transaction (referred to as the “main transaction”), here’s what happens:

– The election is treated as having been made on the same date the original land transaction return was filed.
– Any related land transaction return can be updated during the amendment period to reflect this election.

An ‘affected transaction’ relates to the main transaction. It is defined as one impacted by Para 14, and it must have an effective date that is on or after the main transaction’s effective date.

Conditions for Making the Election

You can only make this election when transferring an interest to a partnership that fits the definition of a property investment partnership as mentioned in Para 14(8).

Making this election has both immediate and future effects that are important to understand.

Immediate Effects of the Election

The immediate impacts of making this election include:

– The removal of the application of Para 10, and if there’s a transfer between partnerships, Para 18 also does not apply.
– The chargeable consideration now equals the market value of the property interest being transferred to the partnership.

Future Effects of the Election

There are also future implications associated with this election:

1. If there’s a later transfer of an interest in the property investment partnership that is considered a Type B transfer, the chargeable interests that were subject to elections under this paragraph are not counted as relevant partnership property.
2. If there is a future Type A transfer of an interest in the partnership, any elections made under Para 12A for specific chargeable interests will not keep those interests from being counted as relevant partnership property.

Examples

To explain these concepts more clearly, let’s consider some examples:

– Example 1: A partner in an established property investment partnership transfers a property worth £500,000 to that same partnership. Normally, Para 10 would dictate how chargeable consideration is calculated, which could lead to a higher tax charge. However, if the partnership decides to make the election, instead, they will use the market value of £500,000 as the tax basis, which might lower their tax obligation.

– Example 2: If the same partnership later tries to transfer part of their property to another partnership, without an election, it could lead to complex tax requirements under Para 18. By electing to dis-apply these provisions, the partnership simplifies their obligations significantly.

– Example 3: If a partner sells their share in the property investment partnership (a Type B transfer) after making the election, the interests covered by the election are excluded from calculations regarding relevant partnership property. Conversely, in a Type A transfer after the election, those interests can still be considered relevant.

Important Considerations

When considering whether to make this election, property investment partnerships should think about:

– Financial Implications: Assess the immediate tax benefits of using the market value against potential future liabilities.
– Structure and Future Transactions: Understand how this election may influence future dealings within the partnership, especially related to transfers.
– Regulatory Compliance: Ensure the election is submitted correctly to meet HMRC requirements. Follow the guidelines laid out for election submissions and understanding the consequential rules.

Making the election is a strategic step for property investment partnerships that can have significant implications on taxation and future transactions. Understanding both immediate and future effects will allow partnerships to navigate their choices effectively.

Every partnership should consult with professional advisors to ensure that they are making informed decisions about these elections and fully benefiting from the provisions granted under the regulations.