Read the original guidance here:
HMRC SDLT: SDLTM34170 – Special provisions relating to partnerships: Interaction of FA03/S53 and Schedule 15

Understanding the Special Provisions for Partnerships in Property Transfers

Overview of the Situation

This guidance provides clarity on how partnerships transfer chargeable interests, like freehold properties, particularly when they involve connected parties and limited companies.

Key Players in the Transfer

Let’s consider a partnership made up of three individuals: A, B, and C. They have the following share of profits:

– A: 60%
– B: 20%
– C: 20%

Although A, B, and C are generally unconnected, B and C are married, which affects how we view their connections in this context.

Transfer to Company D

In this scenario, the partnership owns a freehold property valued at £250,000. The partnership decides to sell this property to a limited company called D, which is owned by partner B. Partner C also has a connection with the company since she is married to B, and her share of control over D is derived from their marriage.

However, the company D only pays £200,000 for this property, which is less than its market value. This difference between the actual sale price and the market value is important when determining tax implications.

Identifying the Vendors

According to Paragraph 2 of the relevant legislation, the partners are deemed the sellers, as they are the actual owners of the property. Since B and C are connected to company D, all partners are viewed as connected because of the relationship between B and C and the rules found in CTA2010/S1122. This means that the property transfer is treated differently because of their connections.

Market Value Consideration

As per section FA03/S53, when partners connected to a company transfer property, the transaction is viewed as occurring at market value, not the lesser price actually paid. Therefore, the tax charged in this transaction is not based on the £200,000 sale price but rather on the market value of £250,000.

Tax Implications Under Paragraph 18

Following the transfer, Paragraph 18 is relevant due to the connection between the partnership and the company. This legislation states that any transfer from a partnership to a connected person results in different tax considerations.

In this case, the lower percentage of ownership (‘the sum of lower proportions’) must be calculated to determine what fraction of the property value is chargeable. The calculation shows that this lower proportion totals 40%, meaning partners B and C together already own 40% of the property value.

Calculating Chargeable Consideration

To find out what the chargeable consideration is under Stamp Duty Land Tax (SDLT), we use the following formula:

– Take the market value (£250,000).
– Deduct the percentage already owned by B and C, which is 40%.

Calculation:
– 100% – 40% = 60%

Thus, the part of the property that is taxable amounts to 60% of the market value:

– 60% of £250,000 = £150,000

This final figure, £150,000, represents the chargeable consideration under the SDLT rules.

Understanding Prioritisation of Provisions

When both FA03/S53 and Paragraph 18 apply to a property transfer, the regulations set out in Paragraph 18 take precedence in determining chargeable consideration. Therefore, even though the original valuation of the property suggests a charge of £250,000, the final amount that will be considered for SDLT is calculated at £150,000 due to the nuances of the partnerships’ connections.

Example Recap

In summary, consider this simplified example:
– A partnership owns a freehold property worth £250,000.
– The property is sold to a company, D, for £200,000.
– Partners B and C are married, making them connected to each other.
– B controls company D.
– Under the law, we must consider that the sale is at market value, thus £250,000.
– Due to connections, the chargeable consideration for SDLT is calculated to be £150,000.

Understanding these provisions helps clarify how property transfers work within partnerships, especially when there are connections between the parties involved. The interaction between market value, ownership percentages, and connected entities plays a significant role in determining the tax charged on such transfers.