Read the original guidance here:
HMRC SDLT: SDLTM34120 – Special provisions relating to partnerships: Partnership Interests: application of provisions about exchanges etc.

SDLTM34120 – Special provisions relating to partnerships: Partnership Interests: application of provisions about exchanges etc.

This article explains the specific tax rules that apply when partners in a partnership exchange their interests in the partnership’s assets, like land or property. The focus will be on the calculation of Stamp Duty Land Tax (SDLT) in such scenarios.

Understanding the Scenario

Let’s consider Partners A and B, who are not connected persons and each holds a 50% share in a partnership that owns two farms. They decide to separate, with Partner A acquiring one farm and Partner B taking the other. In this exchange, Partner A agrees to pay Partner B £100,000 as part of the deal.

To calculate the SDLT owed, we apply specific rules under paragraph 18. The key factors here will be the market value of each farm and the lower portion of the interests held by each partner.

Calculating the SDLT

Step 1: Identify Relevant Owners

First, we need to establish who is a relevant owner. A relevant owner is someone who has a share of a chargeable asset right after the exchange and was a partner just before the exchange. In our case:

• For Partner A: He is a relevant owner because he will have a full share of the farm he takes after the transaction.

Step 2: Identify Corresponding Partners

Next, for each relevant owner, we must identify their corresponding partner.

• For Partner A: His corresponding partner is himself because he was a partner before the exchange and is now the relevant owner.
• For Partner B: He cannot be considered a corresponding partner as he is not connected to Partner A.

Step 3: Calculate the Chargeable Interest

Now we determine what share of the chargeable interest Partner A has after the exchange:

• For Partner A: He gains 100% of the chargeable interest (the whole farm) after the transaction.

Step 4: Determine Lower Proportion

Next, we find the lower proportion of the chargeable interest for Partner A:

• The proportion attributable to Partner A from the chargeable interest is 100%.
• However, we also consider the share he had in the partnership, which is 50%.
• Thus, the lower proportion is 50% because it is the lesser of the two values.

Step 5: Calculate the Sum of Lower Proportions

Since there is only one relevant partner with a lower proportion, we do not need to combine multiple values:

• The sum of lower proportions in this case is 50.

Final Chargeable Consideration

The final step for computing SDLT is using the formula:

Chargeable consideration = Market Value (MV) x (100 – SLP)%

In this example, the calculation becomes:

Chargeable consideration = MV x 50%

Applying the Same Steps for Partner B

Given that the partnership shares are equal, the same steps apply to Partner B:

• He is also identified as a relevant owner because he has a share in the chargeable interest after the transaction.
• Partner B’s corresponding partner is himself, for the same reasons as Partner A.
• Like Partner A, he gains 100% of his chargeable interest after the exchange.
• His lower proportion is also calculated to be 50% (as it matches his partnership share).

Thus, the chargeable consideration for Partner B will also be:

Chargeable consideration = MV x 50%

Key Principles to Remember

• The SDLT charge is based on the market values of the properties exchanged and the proportions of ownership after the transaction.
• It’s important to determine who is a relevant owner and what their corresponding partner is to apply the rules correctly.
• In cases where partners exchange shares, calculating the lower proportion ensures fair tax considerations.

Additional Considerations

This process may become more complex if there are additional properties or more partners involved. In such cases, always ensure to keep track of each partner’s share and follow the outlined steps systematically.

The SDLT calculation can significantly impact the final agreements between partners during an exchange, making it essential to understand these basic principles.