LBTT Guidance: Transferring Chargeable Interests from Partnerships to Partners or Connected Persons

LBTT when land leaves a partnership

When land or another chargeable interest is transferred out of a partnership to a current or former partner, or to someone connected with them, LBTT is not always charged on the full market value. Instead, the taxable amount may be reduced to reflect the recipient’s existing economic interest in the property through the partnership, using a statutory formula in Schedule 17 to the Land and Buildings Transaction Tax (Scotland) Act 2013.

• The chargeable consideration is usually worked out as market value multiplied by (100 minus the sum of lower proportions, or SLP) per cent.
• These rules apply to transfers from a partnership to a current partner, former partner, or a person connected with either, and they override the normal connected persons market value rule if both apply.
• The SLP is calculated by identifying the new owner or owners, linking them to the relevant partner or partners before the transfer, and comparing post-transfer entitlement with each partner’s attributable partnership share.
• A partner’s attributable partnership share is based on a history-based calculation from the relevant date, adjusted for qualifying increases and later decreases, and cannot be less than zero.
• Timing is critical: if a partner has already left the partnership by the effective date of the transfer, their attributable partnership share may be treated as nil, which can remove any reduction.
• In practice, the rules can be difficult because they involve connected persons tests, market value rules, changing partnership shares, and careful tracing of ownership history.

Scroll down for the full analysis.

LBTT on land leaving a partnership: transfers to a partner or a connected person

This page explains how Land and Buildings Transaction Tax applies when land or another chargeable interest is transferred out of a partnership to a person who is, or used to be, a partner, or to someone connected with such a person. The key point is that LBTT is not always charged on the full market value. The legislation can reduce the taxable amount to reflect the recipient’s existing economic stake in the property through the partnership.

What this rule is about

Partnership rules for LBTT try to prevent both over-taxation and under-taxation when land moves into or out of a partnership.

When land leaves a partnership, the law recognises that the recipient may already have had an indirect interest in that land as a partner. If so, it may be inappropriate to charge LBTT on the whole value as though they were acquiring the property entirely from outside the partnership.

Schedule 17 to the Land and Buildings Transaction Tax (Scotland) Act 2013 deals with this. For transfers out of a partnership, Part 5 of that Schedule applies where the property is transferred:

• to a person who is or has been a partner, or
• to a person connected with someone who is or has been a partner.

The rule is the counterpart to the rules for property going into a partnership.

What the official source says

The official guidance states that the chargeable consideration is worked out using this formula:

market value × (100 − SLP)%

Here:

• market value means the market value of the chargeable interest transferred, and
• SLP means the sum of lower proportions.

The effect is to reduce the taxable amount by a percentage that broadly reflects the recipient’s pre-existing economic interest in the property while it was partnership property.

The guidance also says that if the transaction falls both within the connected persons market value rule in section 22 and within Part 5 of Schedule 17, Schedule 17 takes priority. So although section 22 may deem consideration to be market value, the actual chargeable consideration is still recalculated under the partnership formula if Part 5 applies.

The SLP is calculated through a five-step process:

1. Identify the relevant owner or owners. These are the people entitled to a share of the property immediately after the transfer and who were, or were connected with, a partner immediately before the transfer.
2. Identify the corresponding partner or partners for each relevant owner. These are the partners who, immediately before the transfer, were either that relevant owner or were connected with that relevant owner.
3. Work out each relevant owner’s entitlement to the property after the transfer and apportion that entitlement among their corresponding partners.
4. For each corresponding partner, take the lower of:
   • the apportioned entitlement from step 3, and
   • the partnership share attributable to that partner before the transfer.
5. Add those lower proportions together. That total is the SLP.

The guidance notes that joint owners are treated as owning equal shares for this purpose.

What this means in practice

In practical terms, the legislation asks: how much of this property was already economically yours through the partnership before it was transferred to you or someone connected with you?

That existing stake can reduce the LBTT charge. But the reduction is not automatic simply because the recipient is a partner or ex-partner. The detailed calculation matters.

A very important practical point is that the partner’s attributable partnership share may be nil if they have already left the partnership by the effective date of the land transfer. The guidance says that to benefit from the reduction, the exiting partner must still be a member of the partnership at the effective date. If they are no longer a partner at that point, their partnership share attributable to the property is treated as zero, so there is no reduction on that basis.

This means timing matters. If a partner leaves first and the land is transferred later, the tax result may be very different from a transfer completed while they are still a partner.

The rules for the partner’s attributable share are also narrower than they may first appear. The legislation does not simply ask what percentage share the partner has immediately before the transfer. It can require a historical tracing exercise back to the relevant date, adjusted for later increases and decreases.

How to analyse it

A sensible way to analyse a transfer out of a partnership is to ask the following questions.

1. Does Part 5 of Schedule 17 apply at all?

Check whether the transfer is from a partnership to:

• a current partner,
• a former partner, or
• a person connected with a current or former partner.

If yes, these rules may apply.

2. What is the market value of the property transferred?

The calculation starts with market value, not necessarily the actual price paid. This matters especially where the transfer is at undervalue or within a connected structure.

3. Who are the relevant owners after the transfer?

Identify who is entitled to the property immediately after the transfer. If there is more than one owner, work out their shares. If they hold jointly, the guidance says to treat them as equal owners for this calculation.

4. For each relevant owner, who are the corresponding partners?

This requires looking immediately before the transfer. A corresponding partner is someone who was a partner and who was either:

• the relevant owner, or
• connected with the relevant owner.

This is where company structures and family connections can matter.

5. How should the post-transfer entitlement be apportioned among corresponding partners?

The guidance says the taxpayer has discretion in how this apportionment is done. That means the legislation allows a choice, but the choice must still be supportable on the facts and within the statutory framework.

6. What is each corresponding partner’s attributable partnership share?

This is a special calculation. For a partner who remains in the partnership up to the transfer, the guidance says:

1. Start with the partner’s share on the relevant date. The relevant date is:
   • the effective date when the partnership acquired the property, or
   • if the partner joined later, the date they joined the partnership.
2. Add later increases in that partner’s share, but only if LBTT was paid on the land transfer when that increased share was acquired.
3. Deduct decreases in the partner’s share between the relevant date and the transfer out.

If this produces a negative figure, it is treated as zero.

This can significantly restrict the reduction. A partner may have had a large share at one point, but if that share later fell, or if increases were not linked to a taxable land transfer on which LBTT was paid, the attributable share may be much lower than expected.

7. Compare the apportioned entitlement with the attributable partnership share

For each corresponding partner, take the lower of those two figures. Then add them together to get the SLP.

8. Apply the formula

Once the SLP is known, the chargeable consideration is:

market value × (100 − SLP)%

That reduced figure is then used for LBTT.

Example

A partnership owns land worth £500,000. It transfers the land to a company for £300,000. One of the partners, B, controls the company, and another partner, C, is connected through marriage and is also treated as controlling it for these purposes. The partners’ profit shares are A 40%, B 30%, C 30%.

Because the parties are connected, section 22 would normally deem the consideration to be at least market value, so £500,000.

But the transfer is also from a partnership to a person connected with partners, so Part 5 of Schedule 17 applies. The official example calculates the sum of lower proportions as 60. The chargeable consideration is therefore:

£500,000 × (100 − 60)% = £200,000

So although the connected persons rule points to £500,000, the partnership rules override that and reduce the taxable amount to £200,000.

Illustration of timing: if a partner is due to take land out of the partnership on retirement, it can matter whether the land is transferred before or after they cease to be a partner. Under the guidance, if they have already left by the effective date, their attributable partnership share is zero, which may remove the reduction entirely.

Why this can be difficult in practice

These rules are technical because they combine partnership concepts, connected persons rules, market value rules, and a historical tracing exercise.

Some common difficulty points are:

• Working out who is connected with whom, especially where companies and spouses are involved.
• Identifying the correct relevant date for each partner.
• Deciding whether later increases in partnership share can count, since the guidance says they count only if LBTT was paid on the land transfer by which that increased share was acquired.
• Handling changes in partnership shares over time.
• Determining the effective date of the transfer and whether the exiting partner was still a partner at that point.
• Using the taxpayer’s discretion to apportion post-transfer entitlement among corresponding partners in a way that is defensible.

The guidance also shows that the result can differ sharply from what a reader might assume from commercial ownership alone. A person may feel that they “effectively owned” much more of the property through the partnership, but the statutory method may give a lower figure.

Key takeaways

• When land leaves a partnership for a partner, former partner, or connected person, LBTT is usually based on market value reduced by the sum of lower proportions.
• If both the connected persons market value rule and the partnership transfer-out rules apply, the Schedule 17 partnership rules take priority.
• The reduction can depend heavily on timing and on the partner’s attributable partnership share under the statutory history-based calculation.

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Useful article? You may find it helpful to read the original guidance here: LBTT Guidance: Transferring Chargeable Interests from Partnerships to Partners or Connected Persons

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