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HMRC SDLT: Guide on Partnership Property Transfer to Connected Company and SDLT Implications

Understanding SDLTM34170 – Special Provisions for Partnerships and Company Transfers

This guidance article explains how special tax rules apply when a partnership transfers its property to a limited company that is connected to its partners. The focus is to clarify the interaction between specific legislation and the implications for Stamp Duty Land Tax (SDLT).

Key Concepts

• Partnership: A partnership consists of two or more individuals (or entities) who agree to share profits and losses.
• Chargeable Interest: This refers to certain types of property interests that are subject to SDLT, such as freehold property.
• Market Value: The price that property would sell for on the open market.
• Consideration: The payment made for acquiring an interest, which can affect SDLT calculations.
• Connected Parties: Individuals or entities that have a certain relationship with each other, affecting tax treatment.

Scenario Example

Imagine a scenario where a partnership owns a property, let’s say a freehold. This partnership comprises three partners: A, B, and C. They each have different shares in the profits, which are: A has 60%, B has 20%, and C also has 20%. For the purposes of the relevant legislation (Schedule 15), B and C are related as they are married, while A is unrelated to them.

Now, B owns and controls a limited company, which we will call Company D. C is also seen as having control over Company D because her rights are treated as belonging to her husband B, due to their marriage.

The property in question has a market value of £250,000, but Company D only pays £200,000 for it. This creates a scenario where the transfer needs to be examined from a tax perspective.

Determining the Vendors

For SDLT purposes, the three individual partners (A, B, and C) are recognised as the vendors. This is established under Paragraph 2 of the relevant guidelines.

Connectedness and Market Value

Since B and C are connected to Company D, all three partners are treated as connected to this company. This connection applies as per CTA2010/S1122, particularly through the provisions of FA03/S53 which allows for the attributes of control to be considered without any limitations. This means that even though the actual price paid for the property is £200,000, the transfer is deemed to be at its market value of £250,000.

Tax Implications

The first tax rule that applies is under FA03/S53, which states that the transfer is treated for tax purposes at the market value of £250,000. However, additional provisions come into play, specifically Paragraph 18. This applies because the transfer is from a partnership to a company that is connected to one of the partners.

How to Calculate SDLT Consideration

Next, we look at how to calculate the SDLT charge based on these provisions:

• According to Paragraph 20, we need to establish the lower ownership proportions. Here, B and C together have a total of 40% ownership as they both have 20% each. This implies that 60% of the market value is still available for consideration.
• The ownership proportion of 40% indicates that 60% remains as chargeable consideration for SDLT purposes. Thus, the portion that will be taxed will be considered 60% of the market value.

This means that instead of calculating SDLT on the full market value of £250,000, we only consider 60% of this value due to the calculations above.

Final Charge Calculation

The final chargeable amount is therefore determined as follows:

• 60% of £250,000 = £150,000

This means that the effective chargeable consideration for the purposes of SDLT is £150,000, despite the original market value being £250,000.

Summary of Legislative Interaction

When assessing transactions where partnerships transfer properties to companies, it is essential to consider both FA03/S53 and Paragraph 18. The latter takes precedence in determining what portion of the market value is subject to charge for SDLT.

In this scenario, the interaction of control and ownership share among the partners and their connections to Company D influences the SDLT calculation significantly.

Implications for Property Transfers

Parties involved in similar transactions should be aware of how these rules apply to them, as they can lead to different tax obligations than initially expected. Understanding the implications of these provisions, especially regarding connected parties and market value evaluations, can provide clarity and help in financial planning.