Read the original guidance here:
HMRC SDLT: Guide to Calculating Sum of Lower Proportions for Relevant Property Transactions

SDLTM33750 – Understanding the Sum of the Lower Proportions

This guide explains the process for determining the sum of the lower proportions in certain property transactions. This is based on information from HMRC guidance. Here’s how the process works:

Step One: Identify the Relevant Owners

The first step involves identifying the relevant owner or owners involved in the transaction. A person qualifies as a relevant owner if:

• After the transaction: They have a share of the chargeable property.
• Before the transaction: They were either a partner in a business or associated with a partner.

Step Two: Identify Corresponding Partners

Next, you need to pinpoint the corresponding partner or partners for each relevant owner. A person is a corresponding partner if, just before the transaction:

• They were a partner: They must have been a partner in the relevant partnership.
• Connection with the relevant owner: They were either the relevant owner themselves or closely connected with them.

If there is no relevant owner with a corresponding partner, the sum of the lower proportions becomes zero.

Step Three: Determine Chargeable Interest Proportions

For each relevant owner found in Step One, you will need to find the share of the chargeable interest they are entitled to after the transaction. This proportion must then be divided among the relevant owner’s corresponding partners.

There is no fixed way to carry out this division. You can apportion it in a manner that produces the best possible outcome.

Step Four: Find the Lower Proportion for Each Corresponding Partner

Now, you’ll need to determine the lower proportion for each corresponding partner identified in Step Two. The lower proportion can be defined as:

• Proportion of Chargeable Interest: This is the amount of chargeable interest assigned to the partner.
• Partnership Share: If this share is lower than the chargeable interest proportion, then you use the partnership share instead.

The proportion of chargeable interest assigned to a partner is calculated as follows:

• If a corresponding partner relates to one relevant owner: Use the proportion of chargeable interest allocated to them (from Step Three) for that specific owner.
• If they relate to multiple relevant owners: Add together all the proportions of chargeable interest allocated to them (from Step Three) across those owners.

Step Five: Total the Lower Proportions

Add together the lower proportions for each corresponding partner related to one or more relevant owners. This total gives you the sum of the lower proportions.

Special Considerations for Joint Tenants

When looking at who is entitled to a chargeable interest, individuals who hold the interest as beneficial joint tenants are treated as if they have an equal share as beneficial tenants in common according to paragraph 20(2).

Companies and Connections

Regarding companies, for validation in Step Two, a company is viewed as connected to the relevant owner if it:

• Acts as a trustee: The company holds property in a trustee role.
• Connection Based on Tax Law: Its connection with the relevant owner is under the provisions of section 1122(6) of the Corporation Tax Act 2010.

Example to Illustrate the Process

To make the process clearer, let’s work through an example:

Suppose Person A owns 60% of a property and was a partner before the transaction. Person B owned 40% and was not a partner but was connected to Person A, perhaps as a family member. After some restructuring, both A and B are now relevant owners again in a new partnership.

During Step One, we confirm that both A and B are relevant owners since they hold interests in the property after the transaction. Next, we move to Step Two and identify their corresponding partners. If both A and B had partners previously in the original partnership, we acknowledge those connections.

In Step Three, we find that Person A now owns 70% of the property post-transaction and Person B retains 30%. We can apportion these interests separately to their corresponding partners in a way that favours the partnership outcomes.

In Step Four, we assess either the chargeable interests or partnership shares for each partner. If Partner X was a corresponding partner of A and was entitled to 50% of A’s new share, then the lower proportion identified would be the amount they each hold. This process clarifies how value is assigned and ensures transparency.

Finally, during Step Five, we total the lower proportions of partners to get the overall sum necessary for reporting and tax calculations.

The methodology in this guidance helps in understanding how interests and partnerships interrelate in legal terms when processing property transactions.