LBTT Guidance: Transferring Chargeable Interest from Partnership to Current or Former Partner

LBTT on Property Transferred Out of a Partnership

When Scottish land or property is transferred from a partnership to a current or former partner, or to someone connected with them, LBTT is usually worked out under special partnership rules rather than the normal connected-party market value rule. The taxable amount starts with market value but may be reduced to reflect the recipient’s existing economic interest in the property through the partnership.

• The main formula is market value multiplied by (100 minus the sum of lower proportions) per cent, which can reduce the chargeable consideration below full market value.
• These rules apply to transfers from a partnership to a current partner, former partner, or a person connected with either.
• Schedule 17 takes priority over the usual section 22 connected-party market value rule, so the partnership calculation can override a full market value charge.
• The reduction depends on a detailed calculation, including who owns the property after transfer, which partners correspond to them, and each partner’s attributable partnership share before the transfer.
• A key restriction is that a partner usually must still be a member of the partnership at the effective date of the transfer for their prior share to count; if they have already left, the reduction may be lost.
• In the example given, a property worth £500,000 transferred to a company connected with a partner produced LBTT chargeable consideration of £200,000, not the £500,000 market value or the £300,000 paid.

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LBTT when land is transferred out of a partnership to a partner or a connected person

This page explains how Land and Buildings Transaction Tax applies when Scottish land or property is transferred out of a partnership to someone who is, or has been, a partner, or to someone connected with such a person. The key point is that the tax charge is not always based on the full market value. In many cases, the legislation reduces the charge to reflect the recipient’s existing economic stake in the property through the partnership.

What this rule is about

Partnership rules for LBTT are designed to stop the tax result being distorted simply because land is held through a partnership rather than directly. When land moves out of a partnership to a partner, former partner, or connected person, the law recognises that the recipient may already have had an indirect interest in that land through their partnership share.

Because of that, the legislation uses a special formula to reduce the taxable amount by reference to that prior interest. This is the mirror image of the rule for land going into a partnership.

The rule is found in Part 5 of Schedule 17 to the Land and Buildings Transaction Tax (Scotland) Act 2013, especially paragraphs 20 to 25.

What the official source says

Where a chargeable interest is transferred from a partnership to a person who is or has been a partner, or to a person connected with such a person, LBTT applies to the transfer. The chargeable consideration is worked out using this formula:

MV x (100 – SLP)%

Here:

• MV means the market value of the property interest being transferred.
• SLP means the sum of lower proportions, calculated under the detailed steps in Schedule 17.

The effect is that the market value is reduced by a percentage representing the relevant prior partnership interest.

The legislation also says that if the transaction falls both within the market value rule in section 22 and within Part 5 of Schedule 17, Schedule 17 takes priority in determining the chargeable consideration. So even if a connected-party transfer would normally be taxed on full market value, the partnership rule overrides that and may reduce the taxable amount.

What this means in practice

In practice, you do not simply ask what the buyer pays. You first ask whether the transfer is one of the special partnership transactions covered by Schedule 17. If it is, the starting point is market value, not necessarily the actual price. You then reduce that market value by the recipient’s qualifying prior economic interest in the property through the partnership structure.

This matters most in two common situations:

• a partner takes property out of the partnership on leaving or restructuring the business
• property is transferred from the partnership to a company or other person connected with one or more partners

The reduction is not automatic in every case. The legislation contains a structured method for identifying whose prior partnership interests count, and how much of those interests can be used in the calculation.

A particularly important limit is that, to benefit from the reduction, the exiting partner must still be a member of the partnership at the effective date of the land transfer. If they have already ceased to be a partner by then, their partnership share attributable to them is treated as zero. That means there may be no reduction at all for that person’s past stake.

How to analyse it

A sensible way to analyse a transfer out of a partnership is to work through the legislation in stages.

1. Check that the rule applies

Ask whether the land is being transferred from a partnership to:

• a current partner
• a former partner
• someone connected with a current or former partner

If yes, Part 5 of Schedule 17 may apply.

2. Identify the market value

The formula uses market value, not just the amount actually paid. This is important where the transfer is for less than market value, or for no cash consideration.

3. Work out the sum of lower proportions

The legislation sets out five steps.

Step 1: Identify the relevant owner or owners

A relevant owner is a person who, immediately after the transfer, is entitled to a share of the property and who, immediately before the transfer, was a partner or connected with a partner.

If there are joint owners after the transfer, they are treated as owning equal shares for this purpose.

Step 2: Identify the corresponding partner or partners

For each relevant owner, identify the person or persons who, immediately before the transfer:

• were partners, and
• were either the relevant owner or connected with the relevant owner

The legislation contains a special restriction for some company connections. A company is not always treated as connected in full for this step if the connection exists only in limited ways described in section 1122(6) of the Corporation Tax Act 2010, or where it holds property as trustee.

Step 3: Apportion the post-transfer entitlement

Work out each relevant owner’s proportion of the property immediately after the transfer. Then apportion that proportion among that owner’s corresponding partners.

The source material notes that the taxpayer has discretion in how this apportionment is done. That means the legislation allows some judgement here, provided the approach is consistent with the statutory framework.

Step 4: Find the lower proportion for each corresponding partner

For each corresponding partner, compare:

• the apportioned entitlement from step 3, and
• the partnership share attributable to that partner before the transfer

The lower of those two figures is the lower proportion.

Step 5: Add the lower proportions together

Total all the lower proportions. That total is the SLP used in the formula.

4. Determine the partnership share attributable to the partner

This is a special exercise in its own right. For transfers out of a partnership, paragraph 25 sets out how to work it out.

If the partner is still a member of the partnership at the effective date, you:

• start with the partner’s share on the relevant date
• add later increases in that share, but only where LBTT was paid on the land transfer by which the increased share was acquired
• deduct decreases occurring between the relevant date and the transfer out

If the result is negative, it is treated as zero.

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

5. Check whether section 22 also applies

If the transfer is between connected persons, section 22 may deem the consideration to be at least market value. But where the transaction also falls within Part 5 of Schedule 17, Schedule 17 takes precedence. So the final taxable amount is the amount produced by the partnership formula, not the unreduced market value figure from section 22.

Example

Illustration: a partnership owns a property worth £500,000. It has three partners, A, B and C, with profit shares of 40%, 30% and 30%. The property is transferred to company D for £300,000. B owns and controls D, and C is married to B, so connection and control rules bring D within the connected-party framework.

On ordinary connected-party principles, section 22 would substitute market value, so the chargeable consideration would be £500,000.

But the transfer is also from a partnership to a person connected with a partner, so Part 5 of Schedule 17 applies. The official example calculates the sum of lower proportions as 60. The formula then gives:

£500,000 x (100 – 60)% = £200,000

So the chargeable consideration for LBTT purposes is £200,000, not £500,000 and not the actual price of £300,000.

This shows the practical effect of the rule. The legislation recognises that part of the economic interest in the property was already effectively held through the partnership.

Why this can be difficult in practice

These rules are technical, and several points can be fact-sensitive.

• Connected persons: whether a company or individual is connected can depend on detailed statutory rules, including attribution between spouses.
• Timing: whether the recipient was still a partner at the effective date can make a major difference. Leaving the partnership too early may eliminate the reduction.
• Attributable partnership share: not every change in partnership share counts. Increases only count in the paragraph 25 calculation if LBTT was paid on the relevant land transfer when that increased share was acquired.
• Apportionment under step 3: the source says there is discretion for the taxpayer. That means the calculation may require careful reasoning where there are several relevant owners and corresponding partners.
• Interaction with other rules: a transaction may appear to fall under the ordinary connected-party market value rule, but the special partnership code may override it.

The official worked example also shows that changes in partnership shares over time can significantly reduce the final attributable share. A person may at one stage have held a large share in the partnership, but if that share later falls before the property leaves the partnership, the available reduction may be much smaller.

Key takeaways

• When land is transferred out of a partnership to a partner, former partner, or connected person, LBTT is usually worked out under the special Schedule 17 partnership rules.
• The taxable amount is based on market value, reduced by the sum of lower proportions to reflect the recipient’s prior economic interest in the property.
• The timing of partnership membership and the history of changes in partnership shares can be critical to how much reduction is available.

This page was last updated on 24 March 2026

Useful article? You may find it helpful to read the original guidance here: LBTT Guidance: Transferring Chargeable Interest from Partnership to Current or Former Partner

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