Patrick Cannon, Barrister, outlines a five step process for calculating Stamp Duty Land Tax on property introduced into a partnership.
Contribution of Land
References to the transfer of a chargeable interest for the purposes of the special SDLT provisions that apply to the contribution of land into a partnership, the transfer of an interest in a partnership, the distribution of land out of a partnership and associated provisions include –
(a) the grant or creation of a chargeable interest,
(b) the variation of a chargeable interest, and
(c) the surrender or release or renunciation of a chargeable interest: para 9(2) Sch 15 FA 2003.
It is worth remembering this because the special SDLT provisions use the shorthand “transfer of a chargeable interest” and one might otherwise be tempted to think that they do not apply for example to the grant of a lease by one partnership to another.
General Description of the Charge
An SDLT charge arises where a new or an existing partner (or someone connected with them) transfers a chargeable interest to a partnership: para 10(1) Sch 15 FA 2003. In principle the chargeable consideration is deemed to be the proportion of the market value of the contributed property that is attributable to the shares of the other partners immediately after the contribution. The position where the partnership consists of or includes bodies corporate is not considered here.
Ascertaining a Partner’s Share
The share of each partner for this purpose is the proportion in which he is entitled at that time to share in the income profits of the partnership (referred to in the legislation as ‘a person’s partnership share): para 34(2) Sch 15 FA 2003. This is surprising given that the SDLT charge relates to what will normally be a capital asset of the partnership and so one would have thought that the capital profit sharing ratio of the partners was more appropriate. However, HMRC apparently thought that this ratio was more open to manipulation. In selecting the income profit ratio the legislation supplies no guidance as to over which period this is to be adjudged and how to deal with the complex income profit sharing formulae which modern partnership often employ to incentivise their partners. It appears that a partner’s salary plus his residual income profit share are to be taken together for this purpose. Any interest accruing on partner loan capital should also strictly be taken into account because so-called partner ‘loans’ really represent a share in the partnership: Green v Herzog and Others  1 WLR 1309. A mere change in the income profit sharing ratio by itself should not be treated as a transfer of an interest in the partnership because either an actual transfer of an interest to another person or a deemed transfer (a person becomes a partner and another partner withdraws or reduces his interest under the same arrangements) is required: para 36 Sch 15 FA 2003. In other words a mere change in a ‘person’s partnership share’ will not by itself amount to the transfer of an interest in a partnership. While this does leave scope for value shifting amongst partners and “transfers” by dilution of a partner’s existing interest without an SDLT charge that is simply a consequence of the prescriptive nature of the drafting of Sch 15 FA 2003: see further 4.1.
Ascertaining the Chargeable Consideration
The chargeable consideration is based on a proportion of the market value of the property contributed to the partnership and is found by the following formula:
MV x (100 – SLP)%
MV is the market value of the interest transferred and
SLP is the sum of the lower proportions.
The starting point is therefore the sum of the lower proportions or SLP.
Ascertaining the SLP
The SLP is ascertained using a five step formula:
Identify the relevant owner(s) being a person who was entitled to a proportion of the property immediately before the contribution and who immediately afterwards is a partner or connected with a partner.
For each relevant owner identify the corresponding partner or partners; that is a partner if he is the relevant owner and any partners connected with the relevant owner immediately after the contribution who are individuals (but not companies or any other non-individuals). The SLP will be nil if there are no corresponding partners.
For each relevant owner find the proportion of the chargeable interest to which he was entitled immediately before the transaction and apportion that proportion between any one or more of the corresponding partners of that relevant owner. HMRC permit the taxpayer to use whichever apportionment leads to the highest value for SLP and lowers the SDLT charge.
Find the lower proportion for each corresponding partner; that is the proportion of the chargeable interest attributable to the partner (at Step Three) or if lower, the partner’s share immediately after the transaction.
Add together the lower proportions of each corresponding partner in relation to one or more relevant owners.
The result is the SLP. Despite the complexity, the purpose of the SLP calculation is simply to identify the proportion of the property contributed which continues to be attributable to the contributor either as a partner or through partners who are individuals connected with the contributor. In arriving at the proportion of the market value of the property to be charged to SDLT that SLP can then be excluded under the (100 – SLP)% calculation. Where actual consideration is given this is excluded from the SDLT calculation although regard should be had to para 17A Sch 15 FA 2003 which taxes a return of capital within three years of the contribution of property into a partnership: see further 7.1. In summary, therefore, the proportion of the market value effectively given to connected partners who are not individuals and to unconnected partners is charged to SDLT. The reason for not including actual consideration may be that the actual consideration will often be no more than a balancing payment from the non-contributing partners which moves via the partnership accounts from those partners to the contributing partner and which maintains the partners’ shares in the required proportions after the contribution. To tax this payment would in a sense be to impose double tax on the contribution of the property. Strictly speaking a tax charge under para 17A Sch 15 FA 2003 should then arise on the balancing payment however it may be that HMRC do not seek such a charge unless there is some delay in making the payment. This is illustrated in the example below. The position is confusing and until HMRC clarify their policy in this area specific advice should be taken before entering into such a transaction.
White and Black who are unconnected enter into partnership together. White contributes capital consisting of a freehold property worth £750,000 and Black cash capital of £250,000 and they have agreed to share capital and income profits 75:25.
The relevant owner is White (assuming 100% can be a “proportion” of the chargeable interest).
The corresponding partner is White.
White was entitled to 100% immediately before the contribution and as the only corresponding partner this is apportioned entirely to him i.e. 100%.
White’s partnership share is 75% which is lower than the 100% found at Step Three.
There is only one corresponding partner i.e. White himself so there is no aggregation.
Therefore the SLP is 75. The market value calculation is therefore (100-75)% = 25% and 25% x £750,000 = £187,500. The chargeable consideration is £187,500 and represents the proportion of the market value attributable to Black. If Black were to contribute cash capital of £375,000 which is paid through the accounts to White so that they each have a 50% share in the partnership, 50% of the market value of the property will be taxed. The £375,000 as actual consideration will not be taxed. The reason for this may be to avoid taxing the whole value of the property. would be to tax the whole value of the property. The operation of para 17A Sch 15 FA 2003 in these circumstances is uncertain but this provision may not operate if the balancing payment is made at the same time as the contribution.
If White and Black are brother and sister then they are connected. Black is therefore a corresponding partner and White’s 100% interest is apportioned 75:25 between White and Black. White’s lower proportion remains 75% and Black’s is 25% and when added together equal 100%. Therefore the SLP is 100. The market value calculation is therefore (100-100) = £0 chargeable consideration. Only partners connected with a relevant owner who are individuals can be a corresponding partner. If Black was White’s wholly owned company then the SLP would be 75 rather than 100 and the market value calculation would be (100-75) = 25%.
Effect of Debt Charged on the Property
If the property is contributed to the partnership subject to a mortgage and the partnership assumes liability for the debt secured then the liability assumed represents actual consideration given although this will not be taken into account for the purposes of the SDLT calculation. In any event, because the contributing partner is already liable for the debt he cannot assume any of it again and so the amount of the debt treated as assumed should be restricted to the liability assumed that is attributable to the other partners. In the first example of White and Black above, Black would be treated as assuming 25% of any mortgage liability on the property contributed by White. This treatment follows from the application of para 8(1B) Sch 4 FA 2003 and the Notes accompanying the inclusion of this provision in Report Stage Clause 16 (Finance Bill 2004) which stated: “The amendments ensure that in determining the amount of debt assumed each person’s liability for the debt is taken to be a proportion of the debt corresponding to the share that they own in the property subject to the debt”. In practice the existence of the mortgage may mean that the profit sharing ratios would not be 75:25 because White’s share would be reduced to reflect the existence of the mortgage. This would mean that the SLP would be lower than the 75% and Black’s share of the mortgage liability correspondingly higher in this example.
Contribution Consisting of a Lease
Where the whole or part of the contribution to a partnership consists of the grant of a lease (or an agreement for lease), the amount of the rent which would normally be charged to SDLT is reduced by modifications made to Sch 5 FA 2003: para 11 Sch 15 FA 2003. Instead of the net present value of all the rent being taken into account for SDLT, only the relevant chargeable proportion of the net present value is taken into account. The relevant chargeable proportion of the net present value of the rent (plus the market value of the lease, if any) is (100 – SLP) % where SLP is the sum of the lower proportions: see above. In other words, the treatment of the rent equates to the way the market value of a contributed asset is treated and only the proportion of the net present value of the rent attributable to the other unconnected partiers is charge to SDLT.
The proportion of any market value (after allowing for the obligation to pay rent) that is attributable to connected partners who are not individuals and to unconnected partners is also charged to SDLT under para 10 Sch 15 FA 2003. However, this amount is treated as consideration other than rent for the purpose of the rule in para 9 Sch 5 FA 2003 that the 0% band is not available for other chargeable consideration where the average annual rent exceeds £600.
Patrick Cannon is the author of Tolley's Stamp Taxes and Tolley's Disclosure of Tax and VAT Avoidance Schemes. For further information and to order these titles, click here.
The above is an extract reproduced with the kind permission of Patrick Cannon from his Tax Law e-Guides, which can be accessed via Patrick Cannon's website.