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Land Coming Out of a Partnership |
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Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, outlines a potential SDLT charge.ContextA set of rules introduced by FA 2004 into FA 2003 Sch 15 apply where a chargeable interest is transferred:• from a partnership to a person who is or has been one of the partners; or • from a partnership to a person connected with a person who is or has been one of the partners. Ascertaining the chargeable considerationThe chargeable consideration is found much as in the case of the transfer of a chargeable interest to a partnership under para 10, that is with the same qualification for a group transaction (where under para 24 market value is taken) and to the extent that the chargeable consideration includes rent (under para 19). See MTR 11/04 item 3.2.It is expressly provided in para 18(7) that property which was partnership property before dissolution or other cessation of the partnership is treated as remaining as partnership property until it is distributed. The SLP is determined under para 20 in much the same way (mutatis mutandis) as it is under para 12 in relation to the transfer of a chargeable interest to a partnership, with one exception under Step 4, where the partnership share attributable to the partner needs to be found by para 21. Example 1A, B and C are in partnership. Neither B nor C is connected with A. The income shares are A: 40%, B: 30% and C: 30%. The partnership was set up in June 1995 when land worth £100,000 was transferred by A into the partnership. The original income shares were A: 90% and each of B and C: 5%. The partnership income shares have been altered at various times between 1995 and 2002. The present shares have been in force since 2002. However, the capital shares remain A: 90% and each of B and C 5%. The land is now worth £1 million and A, on retirement, is paying the partnership £100,000 for the withdrawal of the land.What is the chargeable consideration?(RCP x MV) + (RCP x AC)The chargeable consideration is split into a market value element and an actual consideration element. The market value element is applied to the RCP where the SLP needs to be established, under para 20. In this case the relevant owner is A. The corresponding partner is A alone (neither B nor C being connected with him). The proportion of the chargeable interest to which A is entitled immediately after the transaction is 100%. The partnership share attributable to A is found by para 21. A’s actual partnership share on 19 October 2003 was 40%. There are no adjustments either to increase or to decrease this share under Steps 2 and 3 under para 21 (see (b) below), there being no changes in A’s partnership share between 20 October 2003 and the day of his retirement. The lower proportion under Step 4 of para 20 is therefore 40% (the lower of the chargeable interest and the partnership share). The sum of the lower proportions (SLP) is also 40%. Therefore applying the above formula the chargeable consideration is found as follows: (60% x £1,000,000) + (40% x £100,000) = £640,000. Partnership share attributable to a partnerThe partnership share attributable to the partner is zero unless:(a) the effective date of the transfer of the relevant chargeable interest to the partnership was before 20 October 2003; or (b) the effective date was on or after that date and either ad valorem Stamp Duty or SDLT was paid on the transfer. The relevant chargeable interest is that which ceases to be partnership property as a result of the transfer or, if the transaction is the grant or creation of a chargeable interest, it is the chargeable interest out of which that interest is granted or created. In a case where either of (a) or (b) above is satisfied, the partnership share attributable to the partner is found by para 22 as follows: Step OneFind the partner’s actual partnership share on the relevant date, which is:• in a case within (a) above, the later of 19.10.03 and the date on which he became a partner; • in a case within (b) above, the later of the effective date of the transfer of the relevant chargeable interest to the partnership and the date on which he became a partner. Step TwoTo that partnership share are added any increases in the partner’s partnership share which occur between the day after the relevant date and immediately before the transfer of the chargeable interest from the partnership and which ‘count’ for this purpose. The result is the increased partnership share. An increase counts for this purpose only where ad valorem Stamp Duty or SDLT has been paid on the transfer.Step ThreeDeduct from the increased partnership share any decreases in the partner’s partnership share which occur between the day after the relevant date and immediately before the transfer of the chargeable interest from the partnership.The result is the partnership share attributable to the partner, but not so as to fall below zero. The partnership share will be zero if: • in a case falling within (a), the partner ceased to belong to the partnership before 19.10.03; or • in a case within (b), the partner left the partnership before the effective date of the transfer of the relevant chargeable interest to the partnership. Example 2A and B are 50/50 partners and are not otherwise connected. Land is transferred out of the partnership to C and D as joint owners: 25% to C, 75% to D. C is connected to B but not to A and D is connected to no-one else. The chargeable proportion of the market value would be 75%, as this is the fraction of the property changing hands to a non-connected party (D). The figure is calculated by determining the lower of C’s ownership outside the partnership (25%) and his ownership (through a connected party) inside the partnership (50%) to give the SLP. This represents the amount not changing hands, the balance of 75% being chargeable. Should payment have been made in this example, 25% of that payment would also be chargeable.Transfer of chargeable interest from a partnership to a partnershipPara 23 deals with the case where there could be two possible charges, on land going into, and on land coming out of, a partnership. The greater of the two possible charges is taxed.CommentExample 1 above might present some surprises. After all, one might say with justification, the retiring partner is simply getting from the partnership what is due to him under his capital account. And yet a huge SDLT liability arises. The reason for this is of course the mismatch between income and capital shares and the fact that (apparently, for reasons of anti-avoidance) the measure of partnership share for SDLT purposes is income rather than capital. Given the possible charges on land coming out of a partnership, the moral must be to think very hard before putting land into a partnership (however desirable that might be, eg in terms of increasing BPR for IHT from 50% to 100%).June 2005 Matthew Hutton More InformationThe above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.About the AuthorMatthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing. |
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About The Author  Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence. Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website. |
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Article Added Saturday, 09 July 2005 |
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