Patrick Cannon, Barrister, outlines the backgound and basic principles of Stamp Duty Land Tax (SDLT) as it applies to partnerships.
Purpose and Basic Principles
The anti-avoidance ethos that pervades the SDLT provisions is perhaps most apparent in the provisions applying SDLT to partnership transactions. The use of partnerships as vehicles to avoid stamp duty on sales of interests in commercial property was so widespread as to be the norm and this led to HMRC describing such vehicles (and others) as “a major threat to the Exchequer”: para 2.37 Modernising Stamp Duty, Inland Revenue April 2002. The transfer of shares or interests in certain property-owing vehicles such as companies, partnerships and trusts was intended to attract an SDLT charge approximate to the SDLT that would be due if the land contained in the vehicle had been transferred directly to the purchaser. In the end HMRC failed to devise suitable provisions concerning corporate vehicles despite the fact that some other European countries plus the seven Australian stamp duty jurisdictions have “land-rich” company provisions in their tax law. Unspecified difficulties with EU law were cited as the reason for this and the “land-rich” company SDLT proposals were quietly dropped prior to the introduction of SDLT on 1 December 2003. However the possibility of a “land-rich” company charge was resurrected by the issue of a consultation document by HM Treasury in December 2007, proposing such a charge in relation to special purposes vehicles owning residential property worth £1m or more. Despite the current absence of a “land-rich” company charge the SDLT provisions do however contain provisions which apply SDLT to certain transactions in land owning partnerships and trusts: for partnerships see the rest of this chapter (and for trusts see Trusts). The provisions relating to partnerships were not ready for the starting date for SDLT decreed by H M Treasury as 1 December 2003 and so, important provisions dealing with the contribution of land into a partnership, the transfer of an interest in a land-owning partnership and the distribution of land out of a partnership only became effective for transactions with an effective date after 22 July 2004 and stamp duty continued to apply to transactions on or before 22 July 2004: s.304 and paras 1 and 3 Sch 41 FA 2004 (introducing a new Part 3 Sch 15 FA 2003). Stamp duty also continues to apply to partnerships holding shares and securities.
The basic purpose of the partnership provisions is then to treat transactions involving partnership and land for SDLT as if they were dealings directly in the land concerned. However, HMRC have devised provisions of such complexity that this basic purpose appears to have been lost in certain circumstances with the result that in certain cases, no SDLT charge arises at all where one would have expected a charge to arise and in others the SDLT charge appears to bear little relationship to the economics of the transaction. For example, until 19th July 2007 when para 36 Sch 15 FA 2003 was altered by section 72 FA 2007, the simple retirement of a partner from a land-owning partnership accompanied by a cash payment to him of his capital invested, represented an economic sale of his interest in the land to the remaining partners but there was no automatic SDLT charge. Such a transaction is also not a disposal for capital gains tax purposes unless the partner’s capital account has been credited with a surplus on revaluation of partnership assets. Despite this, experienced tax (and partnership) advisers were often surprised to learn that there was no SDLT charge in these circumstances. A current example is that the transfer of an interest in a partnership which does not itself hold land but which is itself a partner in a partnership which does hold land, appears not to be a chargeable transaction for SDLT. For an example of when there is a SDLT charge but it bears little if any relationship to the economics of the underlying transaction, see later in this book.
Definition of “Partnership”
For SDLT a “partnership” means a partnership within the Partnership Act 1890, a limited partnership registered under the Limited Partnerships Act 1907, a limited liability partnership formed under the Limited Liability Partnerships Act 2000 (or the Northern Ireland equivalent) or a firm or entity of a similar character formed under the law of a jurisdiction outside the UK: para 1 Sch 15 FA 2003.
Legal Personality Disregarded
The “look through” principle in relation to land-owning partnerships is enshrined in SDLT by para 2 Sch 15 FA 2003. A chargeable interest held by or on behalf of a partnership is treated as held by or on behalf of the partners and a land transaction entered into for the purposes of a partnership is treated as entered into by or on behalf of the partners and not by the partnership as such. This principle applies even where the partnership is regarded as a legal person or a body corporate under its local law as for example in the case with a Scottish partnership under s 4(2) Partnership Act 1890.
The detailed provisions that are supposed to follow this clear guiding statement of principle do not however always faithfully reflect the “look through” approach. Anyone hoping to adopt this principle by applying a purposive approach to interpreting the SDLT partnership provisions may accordingly find certain of the detailed provisions confusing and difficult to follow. An example of this occurs with the rules for the application of various SDLT exemptions and reliefs to partnership transactions. Here highly complex modifications have been made that distort the application of the “look through” principle even though the intention was not to limit the scope of the exemptions and reliefs in their application to partnerships.
A partnership is treated as the same partnership despite a change in the membership, as long as at least one person who was a partner before the change remains as a partner after the change: para 3 Sch 15 FA 2003. The presence of this provision prevents an SDLT charge arising every time there is a change in the membership of the partnership.
A partnership is not regarded as a unit trust scheme or an open ended investment company for SDLT: para 4 Sch 15 FA 2003.
Partnership as Ordinary Purchaser
Where a land transaction is entered into by or on behalf of the partnership as a purchaser, the ordinary SDLT rules relating to direct purchases and leases of land apply (unless the transaction is with a partner, someone who becomes a partner because of the transaction or someone connected with either person) and the special rules relating to the contribution of land into a partnership, the distribution of land out of a partnership and the transfer of an interest in a partnership do not apply. The liability to pay the SDLT falls on the partners at the effective date of the transaction and any person who becomes a partner after that date. These persons are referred to as the “responsible partners”: para 6(2) Sch 15 FA 2003. The responsible partners are treated as the purchaser for SDLT compliance purposes subject to the nomination of a “representative partner” to carry out the compliance work, that is a partner or partners nominated by a majority of the partners to act as a representative of the partnership (notice having first been given to HMRC): paras 6(1) and 8 Sch 15 FA 2003. The tax liability of the responsible partners is joint and several: para 7(1) Sch 15 FA 2003. However, no amount of SDLT or interest on unpaid tax may be recovered from a person who did not become a responsible partner until after the effective date of the transaction: para 7(1A) Sch 15 FA 2003. And no penalty may be recovered from a person who did not become a responsible person until after the penalty had accrued: para 7(3) Sch 15 FA 2003.
The above is taken from Patrick Cannon's book 'Stamp Duty Land Tax: Law and Practice', and is repdroduced with the kind permission of the author.