Read the original guidance here:
HMRC SDLT: SDLTM34430 – Application of exemptions and reliefs: Group Relief

Understanding SDLT Application and Group Relief

This article explains how Stamp Duty Land Tax (SDLT) liability arises when transferring a property interest from a company like B Ltd to a partnership such as SP/Sc LP. We focus specifically on the rules that apply to partnerships and how to determine if any SDLT is payable based on certain paragraphs of the guidance.

Step-by-Step Process to Determine SDLT Liability

To assess whether SDLT is due when a transfer occurs, follow these steps:

Step One: Identify the Relevant Owner or Owners

– The relevant owner in this scenario is B Ltd.
– Immediately before the transfer, B Ltd holds a portion of the chargeable interest, and after the transfer, it becomes a partner in the partnership SP/Sc LP.

Step Two: Identify Corresponding Partners

– Relevant owners must have corresponding partners.
– In this case, B Ltd is its own corresponding partner, as it is still a partner immediately following the transfer.
– Since C Ltd is connected to B Ltd, they share a group status. Therefore, C Ltd is also considered a corresponding partner under paragraph 27A of the SDLT rules.

Step Three: Determine Chargeable Interest Proportions

– Before the transfer, B Ltd is entitled to 100% of the chargeable interest.
– Because there are two corresponding partners (B Ltd and C Ltd), we need to split this proportion.
– For our example, we will split the interest equally: 50% to B Ltd and 50% to C Ltd. This equal division allows for the most advantageous tax outcome.

Step Four: Identify the Lower Proportions for Each Partner

– Each corresponding partner’s share cannot exceed the smaller of two values:
– The portion of the chargeable interest attributed to the partner, or
– The partnership share owned by the partner.
– Since both partners have been allocated 50% of the chargeable interest, and the partnership share for both partners is also 50%, each partner’s lower proportion is 50%.

Step Five: Calculate the Total Lower Proportions

– Now we need to total these lower proportions:
– 50 (B Ltd) + 50 (C Ltd) = 100.
– Consequently, since the sum of the lower proportions equals 100, the chargeable consideration for this transaction is zero. This means that no SDLT is due for this transfer.

Understanding Paragraph 27A and Group Relief

If paragraph 27A had not applied during the transaction, then C Ltd would not have been classified as a corresponding partner. This alteration would have impacted the SDLT liability significantly:

– Without paragraph 27A, the share of the chargeable interest eligible for SDLT assessment would have been halved. In our example, the amount due would be calculated based on 50% of the market value of the interest being transferred.

The importance of paragraph 27A is that it reduces the SDLT charge significantly. In this case:

– By applying paragraph 27A, the Special Landlord Proportion (SLP) is considered to be 100%.
– This change means the SDLT charge is effectively nil as C Ltd is recognised as a corresponding partner alongside B Ltd.

Overall, this results in a 50% reduction of the tax charge, as the value under normal circumstances (with C Ltd not being recognised as a corresponding partner) would have put the SLP at 50. Essentially, applying paragraph 27A converts a potential SDLT liability into a zero charge:

– Normal state: C Ltd not being a partner leads to SDLT on a 50% market value.
– With paragraph 27A: SLP is seen as 100%, leading to no SDLT.

The Requirement for Group Relief Claim

For the partnership to benefit from this SDLT reduction due to the application of paragraph 27A:

– They must make a claim for group relief when submitting a land transaction return.
– In this example, the return should highlight the reduction by 50%, as established earlier.
– The partnership must also ensure they meet standard group relief conditions outlined in Schedule 7, paragraph 2, with some specific adjustments for this situation per paragraph 27A(3).

This means that partnerships have the opportunity to lessen their SDLT liabilities when transferring properties if they strategically utilise the provisions under paragraph 27A, illustrating how interconnected business relationships can provide significant tax advantages.