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TaxationWeb by Matthew Hutton MA (Oxon) FTII AIIT TEP

The application of FA 2004 Sch 41 to various land transactions involving partnerships is presenting some difficult and urgent issues. The following article is based on Notes by Matthew Hutton's Lecture Notes for his full-day Conference on Stamp Duty Land Tax.

The next conference on Stamp Duty Land Tax is due on Tuesday, 28th September 2004 (for forthcoming conferences, visit www.taxationweb.co.uk/events) in London, at the Law Society in Chancery Lane, WC2. A few places remain (@ £250 plus VAT) and, subject to availability, can be secured by email to Matthew on mhutton@paston.co.uk by close of business on Wednesday 22nd September 2004. Alternatively, a set of Notes (running to over 300 pages) can be ordered for £50 - visit www.taxationweb.co.uk/reviews/estate_planning_conference_review.php

1. TRUSTS AND SUB-TRUSTS

1.1 Settlements

A “settlement” is defined as a trust which is not a bare trust (FA 2003 Sch 16 para 1(1)). A “settlement” therefore will include interest in possession trusts, discretionary trusts (including accumulation and maintenance trusts) and mixed trusts.

Example

Honest Trustees Ltd holds property on trusts under which Susan Price has a right to the income generated by the property but no rights in relation to the capital. This is a settlement for the purposes of SDLT.

Where a person acquires a chargeable interest as trustees of a settlement, the trustees are deemed to acquire the interest acquired including the beneficial interest (FA 2003 Sch 16 para 4). Therefore the trustee is the purchaser. Using the example above, if Honest Trustees were to acquire land to be held on trust for Susan Price, they will be deemed to acquire the whole interest in the property including the beneficial interest.

1.2 Trust reorganizations

The issue as to whether SDLT is payable on a trust reorganisation raises some interesting points. For example within the Bennett family, Trust A owns Appledown Manor and Trust B owns Combe Lodge. The two Trusts decide to restructure the land holdings so that Trust A ends up with Combe Lodge and Trust B with Appledown Manor, together with payment of any equality money. This will be an exchange of land with a liability to SDLT on each side of the transaction.

However, contrast this with the situation of Trust C (not a bare trust) which owns Greenacre which the trustees have appropriated to Fund X and Redacre appropriated to Fund Y, each Fund having a distinct class of beneficiaries. If there is a reallocation of land within the two Funds, whether or not with equality money, the question arises as to whether there are any SDLT implications. The question has been put to the Stamp Office: subject to the Revenue’s view, the lecturer considers that there is no land transaction and therefore no SDLT implications. The issue would seem to depend on whether ‘settlement’ for SDLT purposes equates to a settlement for CGT (as the writer believes) or whether the expression could extend to an identifiable fund within the settlement (which might have different trustees from other such funds).

The appropriation would constitute a land transaction if it were the acquisition of a chargeable interest in land. But there would have been no such acquisition: the trustees continue to hold the legal estate in both Greenacre and Redacre, the appropriation making no difference. If it is not a land transaction at all, it becomes unnecessary to decide whether it is a chargeable transaction – which it would not be if there were no chargeable consideration (FA 2003 Sch 3 para 1). If it were a land transaction, however, the question becomes ‘who is the purchaser?’. It can clearly not be the beneficiary, who plays no part in the appropriation (having no power to appropriate, his consent not being required and it being unnecessary for him to take any step to perfect the appropriation). Incidentally, the SDLT Manual states that the disposition of property to a beneficiary under a trust in accordance with the terms of the trust is not chargeable to SDLT, there being no consideration for the acquisition (SDLTM 00520 and 00530). The same should apply in relation to an appropriation made to give effect to an income beneficiary’s share in the trust fund. Not being a chargeable transaction, nor would it be a ‘notifiable transaction’ under FA 2003 s77(3).

2. WILLS: THE DEBT AND CHARGE SCHEMES FOR IHT MITIGATION PURPOSES

2.1 The schemes outlined

There is a fairly well-tested IHT mitigation arrangement involving the family home owned by a married couple as tenants in common in equal sharers. On the first death it is axiomatic that full use should be made of the nil-rate band of the deceased by passing chargeable value in the estate to beneficiaries other than the surviving spouse. With the nil-rate band for 2004/05 of £263,000, this presents a tax saving opportunity worth £105,200 at 40%. Ideally, assets other than bricks and mortar are available for the purpose, but in default and given the risks (thinking of insolvency, matrimonial breakdown or an attempt to sell) it is unwise to leave a share in the house to the children. The gift therefore is constituted either by (a) a simple IOU given by the surviving spouse to the personal representatives or (b) a charge over the property subject to which the deceased’s share is assented to the survivor, either the debt or the charge constituting the trust fund of the nil-rate band discretionary trust created under the deceased’s Will.

2.2 The Stamp Duty analysis

Under Stamp Duty there were not generally thought to be actual Stamp Duty issues of the debt route, in particular because Stamp Duty is a voluntary tax. And, in relation to the charge route, Statement of Practice 6/90 effectively avoided any problem because the survivor was giving no consideration insofar as she gave no covenants for payment of interest or repayment of capital.

2.3 The SDLT position

For SDLT purposes, it seems on the face of it that under the IOU route there is a land transaction in which the widow is the purchaser. The value of her estate is being enlarged (other than under the Will) for which she gives consideration in the form of the IOU. There have been arguments to suggest that the IOU is not consideration for a land transaction, though not surprisingly not generally accepted by the Stamp Office.

However, the surprising view which has been expressed by certain quarters within the Stamp Office is that under the charge route the widow does give consideration by assuming the liability. Under FA 2003 Sch 4 para 8(1) it is (inter alia) only where there is an assumption by the purchaser of existing debt that that is taken to be chargeable consideration. In this case, however, the liability is simply charged on the house passed by the personal representatives to the widow and there is no personal liability assumed on the part of the widow. If the trustees of the discretionary Will trust wish to enforce the liability they simply exercise their power of sale. To date the Stamp Office are not unequivocally accepting the argument that the widow never personally becomes a borrower (she simply takes over a property the value of which has been reduced before her involvement by a charge for which she is not and never can be held to be personally liable.) Indeed, this was the position under Stamp Act 1891 s57, as confirmed in SP 6/90.

The above said, different views on both routes have been expressed by various people in the Stamp Office. A definitive view is urgently awaited.

3. PARTNERSHIPS

3.1 Background

Only ‘ordinary partnership transactions’ as defined were subject to SDLT from 1 December 2003 (by FA 2003 Sch 15). Such transactions are broadly those which the partnership makes on behalf of all the partners as a purchaser which were not excluded from Sch 15 Part 3. Those excluded transactions were:

(a) the transfer of an interest in land into a partnership;
(b) the acquisition of an interest in a partnership; and
(c) the transfer of an interest in land out of a partnership.

Those three types of partnership transaction remained subject to Stamp Duty until July 23 2004 (the day after Royal Assent to FB 2004), FA 2004 Sch 41 providing for a substituted Part 3 of FA 2003 Sch 15 from that date.

The new rules as enacted present a significantly different regime from that first proposed in the draft clauses (in changes largely beneficial to the taxpayer), as well as reflecting very substantial changes made to FB 2004 at Report Stage, in some haste it appears, with the result that there are certain acknowledged inaccuracies in the enacted provisions.

What follows includes some of the content of the Treasury Notes on the FB 2004.

3.2 Scope of new Sch 15 Part 3

Paras 9 to 40 are introduced as new Sch 15 Part 3. The transactions to which it applies are (expressly):

(a) the transfer of a chargeable interest to a partnership (paras 10 - 13);
(b) the transfer of an interest in a partnership (paras 14 – 17); and
(c) the transfer of a chargeable interest from a partnership (paras 18 – 24).

The transfer of a chargeable interest expressly includes (para 9(2)):

(a) the grant or creation of a chargeable interest,
(b) the variation of a chargeable interest; and
(c) the surrender, release or renunciation of a chargeable interest.

3.3 Transfer of chargeable interest to a partnership

(a)The basic rule
Para 10 applies where:

(a) a person transfers a chargeable interest to the partnership; or
(b) a person transfers a chargeable interest to a partnership in return for an interest in the partnership; or
(c) a person connected with either a partner or with a person who becomes a partner as a result of or in connection with the transfer transfers a chargeable interest to the partnership.

The chargeable consideration is: (RCP x MV) + (RCP x AC) where:

RCP is the relevant chargeable proportion;
MV is the market value of the interest transferred; and
AC is the actual consideration for the transaction.

The RCP in relation to the market value of the interest transferred is:
(100 – SLP)%, where SLP is the sum of the lower proportions. The RCP in relation to the actual consideration is SLP%.

(b) The thinking behind the rule

The aim of the new regime is to reduce the market value charge on the chargeable interest transferred to a partnership in which the owner is or becomes a partner by the lower of (a) his ownership of the interest outside the partnership and (b) his interest in the partnership. The same effect is achieved for transfers out of joint ownership. And partnership interests of persons connected with the transferor are assumed to belong to the transferor. A proportion of any consideration actually given for the transfer (whether or not by connected persons) is also charged.

In effect, the partnership acquiring the chargeable interest must identify what proportion of the chargeable interest changes hands (ie, beyond the partnership interest of the transferor or persons connected with him) and it is that proportion of the market value of the interest which is charged to SDLT.

Significantly, however, it is income and not capital shares which are used to measure partnership shares (para 34(2)).

The calculation works by determining:

- which of the transferor(s) either is a partner or is connected with a partner;
- for each of these transferor(s), the lower of the percentage of their ownership outside the partnership and that of their ownership (or that of connected persons) inside the partnership.

Where there is more than one such transferor, the proportions determined for each transferor are aggregated to determine how much remains in their ownership.

Example 1

Mr Armstrong transfers land worth £1m into a partnership consisting of his daughter Linda, son James and another unconnected person Simon, for no consideration. Each partner has an equal one third income share in the partnership. The SDLT charge is based on the amount of land now owned (via the partnership) by the unconnected person Simon (as measured by his income share in the partnership), viz £333,333 charged at 3%, to produce an SDLT charge of £10,000.

Where there is payment, the same proportion of the payment as is being charged to market value is ignored and the balance is charged.

Example 2

A transfers land worth £500,000 to a partnership comprising A and B (an unconnected person). B has a 40% share in the partnership and pays £100,000. The charge is on 40% of market value and 60% of the payment (as 40% of the payment is already covered by the market value charge). SDLT is therefore charged on £(500,000 x 40%) + (100,000 x 60%) = £200,000 + £60,000 = £260,000.

(c) Where the chargeable consideration includes rent (para 11)

In a case where rent forms all or part of the consideration for the transfer of a chargeable interest to a partnership, there is a substituted computation for the chargeable consideration. In effect, it becomes the equivalent proportion of the ‘net present value’ of the rent, together with the equivalent proportion of the market value of any chargeable consideration other than rent (whether or not such consideration is payable).

(d) The sum of the lower proportions (para 12)

The SLP (sum of the lower proportions) is relevant to finding out the chargeable proportion under para 10 for both the market value and the actual consideration paid. Five steps are required by para 12:

1. Identify the relevant owner (or owners), viz the person who immediately before the transaction was entitled to a proportion of the chargeable interest and immediately after the transaction is a partner or is connected with a partner.

In Example 1, this is Mr Armstrong.

2. For each relevant owner, identify the corresponding partner or partners, viz the partner who immediately after the transaction either is the relevant owner or is connected with the relevant owner.

In Example 1, these are Linda and James.

3. 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 relevant owner’s corresponding partners.

In Example 1, this is 100% apportioned 50/50 between the corresponding partners Linda and James.

4. Find the lower proportion for each person who is a corresponding partner in relation to one or more relevant owners. The lower proportion is the lower of:

(a) the proportion of the chargeable interest attributable to the partner; and

(b) the partner’s partnership share immediately after the transaction,

To find (a), it is:
- if he is a corresponding partner in relation to only one relevant owner, the proportion (if any) of the chargeable interest apportioned to him at Step 3 in respect of that owner;

- if he is a corresponding partner in relation to more than one relevant owner, the sum of the proportions (if any) of the chargeable interest apportioned to him at Step 3 in respect of each of those owners.

In Example 1, each of Linda and James has a lower proportion of 1/3.

5. Add together the lower proportions of each person who is a corresponding partner in relation to one or more relevant owners.

The result is the sum of the lower proportions (SLP).

In Example 1, the SLP is 1/3 plus 1/3 = 2/3. So the ‘relevant chargeable proportion’ or RCP in relation to the market value is (100 – 66.7)% = 33.3%. .

Example 3

W, X, Y and Z are in equal partnership. X and Y but not Z are connected to W. W transfers land to the partnership worth £1 million, for which X and Y pay £100,000 each and Z pays £400,000 to W. What is the SDLT charge for the partnership?

To work out the SLP: W is the relevant owner. The corresponding partners are W, X and Y. The proportion of the chargeable interest to which W was entitled immediately before the transaction is 100% apportioned equally between W, X and Y. The lower proportion is 25% for each of W, X and Y. The sum of the lower proportions is 25% + 25% + 25% = 75%.

The relevant chargeable proportion in relation to the market value of the land transferred is (100 – 75)% = 25%.

The chargeable consideration is:

(RCP x MV) + (RCP x AC) viz
(25% x £1 million) + (75% x £600,000) viz
£250,000 + £450,000 = £650,000, which attracts SDLT at 4% of £26,000.

(e) Transfer of chargeable interest to a wholly corporate partnership (para 13)

In a case where the transferee partnership is a group of companies and the SLP is 75 or more (ie group relief would apply on a claim), the chargeable consideration in para 10 is equal to the market value of the interest transferred. There is a corresponding adjustment to para 11 where the chargeable consideration includes rent. That is, the market value rule applies, whatever the consideration (if any). If the transferor is a 75% group company, group relief can be claimed on the transfer.

Substitution of market value for the actual consideration in a group situation effectively prevents the use of the reduced charge in order to avoid having to claim group relief.

(f) Transfer of land to partnership: planning possibilities?

The example in para 6 of the Report Stage notes has an unconnected party paying £100,000 for a 40% share in the partnership. In an arm’s length transaction one would expect the market value of the property to be £250,000. The notes state that the charge is 40% of the market value (40% x £250,000) and 60% of the payment (60% x £100,000) producing £100,000 + £60,000 = £160,000 on which SDLT is charged.

If, alternatively, outside the partnership Husband and Wife together sold 40% in the property to the unconnected person B for £100,000, one would expect the SDLT charge to be on £100,000. Suppose all the parties then introduced the property into the partnership, so that the income ratios remain the same as the property-owning ratios. SLP becomes 100%. If no cash passes therefore, one would expect there to be no SDLT liability, since AC = 0 and RCP x MV = 0, because RCP = 0. In this case SLP must be 100%, since each person owning the property before the transaction is a relevant owner: Husband and Wife are the corresponding partners to themselves and B is a corresponding partner to himself.

Note that this analysis conflicts with the CIOT representations suggesting that AC is not zero in a case where all the partners introduce the property into the partnership effectively crediting their capital accounts. But surely AC must be actual consideration. The Report Stage notes the intention behind the amendments being to ensure that where there is a transfer by joint owners of land into a partnership to which they belong the charge is only on the part (if any) of the land they no longer own. In this example the ratios do not change at all on introduction of the land into the partnership, so AC must be zero.

However, there could be actual consideration even if no payment were made directly to Husband and Wife. For example, Husband and Wife could introduce the property into the partnership at £250,000, crediting their capital accounts accordingly. B introduces £100,000 to the partnership. One could argue that there is no actual consideration at this stage. However, one would expect a change in the profit-sharing ratios such that, if Husband and Wife then had a 30% profit-sharing ratio each and B 40%, then in order to keep the capital accounts in line, Husband and Wife would together withdraw £100,000. This clearly would be actual consideration, so the charge would be on 40% of £250,000 plus 60% of the payment, ie on £160,000.

3.4 Transfer of partnership interest (paras 14 – 17)

(a) The statutory rule (para 14)
Where there is a transfer of an interest in a partnership, consideration is given for the transfer and the relevant partnership property includes a chargeable interest, the transfer is taken to be a land transaction which is a chargeable transaction.

The purchaser is the person who acquires an increased partnership share or who becomes a partner as a result of the transfer.

Consideration is given for the transfer if:

where a person transfers the whole or part of an interest as partner to another person (whether or not an existing partner), the transferee pays consideration in money or money’s worth;

where a person becomes a partner and an existing partner either reduces his interest in the partnership or ceases to be a partner, that person withdraws money or money’s worth from the partnership.

The ‘relevant partnership property’ excludes any interest which was transferred to the partnership in connection with the transfer and also market value leases excluded by para 15.

The chargeable consideration is a proportion of the market value of the relevant partnership property. That proportion is:

(a) if the transferee was not a partner before the transfer, his partnership share immediately after it; and

(b) if he was a partner before the transfer, the difference between his partnership share before and after the transfer.

Incidentally, note that the para 14 charge is triggered whenever consideration is given for the transfer (as set out above). Once consideration is paid, the actual consideration is disregarded and SDLT is applied on the basis of the market value rule. Note also, that, unlike the position for transfer of land to or withdrawal of land from a partnership, there is no ‘let out’ for connected persons. Consider the following example.

Example 4

Jim farms in partnership with his wife Caroline and son Bob, with the partnership income shares being 50%, 30% and 20% respectively. Jim transfers a partnership interest to Caroline which includes £800,000 of land. Caroline pays Jim £50,000. Jim’s partnership income share reduces to 40% and Caroline’s increases to 40%.

The chargeable proportion of the market value of the relevant partnership property is 10% of £800,000 viz £80,000 (below the threshold for non-residential property), that is the difference between Caroline’s partnership share before and after the transfer.

(b) Market value leases (para 15)
Among the four conditions for market rent leases in para 15, the lease must be 5 years or less or, if more than 5 years, there must be a market rent rent review at least every 5 years.

The exclusion of market rent leases from relevant partnership property is easy enough to understand, designed as it is to exclude from chargeable consideration leases which have no discernable value. A difficulty may arise with agricultural leases which generally will have a term for more than five years. To qualify as a market rent review the rent must be reviewable at least once in every five years and the rent payable as a result of a review must be a market rent at the review date. This should be satisfied in the case of a continuing lease where the market rent would be that awarded by a tribunal. However, in the case of a new tenant, the market rent is likely to be higher than that set by a tribunal, viz the tender rent. In those circumstances, the condition should still be satisfied on the basis that this would be the ‘market rent’ as defined.

(c)Exchanges of land (para 16)
Where there is an exchange of land in connection with acquiring an interest in a partnership, the interest in the partnership is treated as a major interest in land for purposes of FA 2003 Sch 4 para 5, if the relevant partnership property includes a major interest in land. These provisions relating to partitions at FA 2003 Sch 4 para 6 are disapplied.

(d) Anti-avoidance provisions (para 17)
The partnership share acquired in exchange for the transfer of land into a partnership may have been artificially increased. That would therefore lower the proportion of the other partners’ partnership interests and the SDLT charge correspondingly. There is a deemed chargeable transaction (to counteract the SDLT advantage) when there is a readjustment to those artificial partnership shares.

(e) Problem: changes in profit sharing ratios
An opposition amendment to what is now para 34 of Sch 41 would have substituted capital for income sharing ratios in determining a partner’s partnership share. Quite apart from obvious difficulties where there are disparities between income and capital shares (see below), consider the effect of adjustments in prior salaries to a partner’s total ’take’ where the profit sharing ratios remain the same.

Example 5

Year 1
Salary Profit Total %
A 75,000 75,000 27.27
B 50,000 75,000 125,000 45.45
C 75,000 75,000 27.27

Total 50,000 225,000 275,000 100.00%

Year 2
Salary Profit Total %
A 200,000 200,000 30.77
B 50,000 200,000 250,000 38.46
C 200,000 200,000 30.77

Total 50,000 600,000 650,000 100.00%

The question is whether in such (not uncommon) circumstances there is an SDLT issue under para 14. The issue is whether an increased partnership share has been acquired (in this Example by A and C). The argument that consideration has not been given would be that it is only on a change in the residual income shares that there is a shift in the sharing of liabilities and consideration is given by one partner to the other(s).

However, if there were an occasion of charge in such a case and the land concerned was worth say £6 million, there would be an SDLT charge at 1% unless A and C were connected with B, in which case the SDLT charge would be at 3%, and the compliance obligations would be horrendous. To be on the safe side a provisional return should be submitted within 30 days of the earliest point at which the ‘effective date’ can be said to occur, with a series of claims and disclosures once the accounts are finalised (since only at that point will the precise income sharing ratios relative to each other be determined).

The issue is being put to the Stamp Office, with the suggestion that it is only when there is a change in residual income-sharing ratios (ie, quite apart from prior salaries) that SDLT has to be considered. One particular problem is that partnership deeds drafted in various ways could produce the same effect, though (depending on the drafting) with different SDLT effects.

(f) Problem: the disadvantage of the linked transaction rules
Assume a transfer of a partnership interest, with A reducing his share and B and C increasing their shares. If B and C are not connected, the linked transaction rules in FA 2003 s108 cannot apply and the acquisition by each of B and C will have its own threshold. However, the linked transaction provisions will apply if B and C are connected (such as being Husband and Wife) and clearly, if in a partnership situation the value acquired by them jointly exceeds the threshold, there will be SDLT to pay.

However, if a partnership acquires land, this seems to be no different from an acquisition by a joint purchaser which under FA 2003 s103 will be a single transaction. Where there is a transfer of an interest in property into a partnership, the unconnected partner paying £100,000 to Husband and Wife transferors (as in the Revenue’s Example at 1.3.3(f) above), the chargeable consideration is £160,000. SDLT will be payable insofar as the consideration exceeds the £150,000 threshold for non-residential property.

(g) Death
Assume a partnership owning land with partners A, B & C all sharing profits equally. A dies. Under the partnership agreement his share vests in his personal representatives, but B and C have an option to acquire the land in standard terms. Does the exercise of the option trigger SDLT? It is hard to see that para 36(a) applies, as the personal representatives are not a partner. The effect of para 29 is that there cannot be an SDLT liability unless (inter alia) para 14 (transfer of partnership interest: consideration given and chargeable interest held) applies. There should therefore be no SDLT liability, though the Revenue needs to agree this.

Equally, it is hard to see how there could be a Stamp Duty liability on the land interest under para 31, since para 32 would exclude the underlying land interests from charge (though there might be an issue if there were a secured loan on the partnership land).

3.5 Transfer of chargeable interest from a partnership (paras 18–24)

(a)The statutory rule (para 18)
The third set of rules apply where a chargeable interest is transferred:

(a) from a partnership to a person who is or has been one of the partners; or

(b) from a partnership to a person connected with a person who is or has been one of the partners.

The 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).
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 the same way 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 6

A, 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 19th 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 20th 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.

(b) Partnership share attributable to a partner (paras 21 and 22)
The 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 20th 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 ONE
Find the partner’s actual partnership share on the relevant date, which is:

- 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 TWO
To 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 THREE
Deduct 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 7

A and B are 50/50 partners and are not otherwise connected. Land is transferred out of the partnership to C and D in 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.

(c) Transfer of chargeable interest from a partnership to a partnership
Para 23 deals with the case where there could be two possible charges, on land going in, and on land coming out, of a partnership. The greater of the two possible charges is taxed.

(d) Problem: SDLT charge on withdrawal of land from a partnership dependent on profit-sharing ratios

Example 8

Husband and Wife are in partnership with capital profit-sharing ratios 50/50 but income-sharing ratios Husband 1% and Wife 99%. They wish to transfer a freehold property out of the partnership. The property was held by the partnership before 20th October 2003 and there have been no changes to any profit-sharing ratios since then.

Consider two scenarios. First, that the property after the transfer is held by Husband and Wife in the shares Husband 1% and Wife 99% or alternatively 50/50.

CASE A
The relevant owners are both Husband and Wife. The corresponding partners for Husband are of course both Husband and Wife and for Wife they are both Wife and Husband. The proportion of the chargeable interest to which Husband and Wife are entitled immediately after the transaction is Husband 1% and Wife 99%. This is then apportioned between the relevant owner’s corresponding partners. The Husband’s 1% share is apportioned to both Husband and Wife and the Wife’s 99% share is apportioned to both Wife and Husband. The lower proportion for the Husband is 1% and for the Wife 99%. The sum of the lower proportions is therefore 100%.

CASE B
While Steps 1 and 2 are the same, the difference is in Step 3, the proportion of chargeable interest. Both Husband and Wife are entitled to 50% immediately after the transaction. At Step 4 the lower proportion for Husband is 1% (the lower of the chargeable interest attributable to him and his partnership share, viz 1%). The Wife’s lower proportion is 50%. The SLP therefore is 51% producing an SDLT charge of 49% of the market value of the property on leaving the partnership.

Alternatively, could one under Step 3 apportion Husband’s 50% share: 1% to Husband and 49% Wife? The Wife’s 50% share would be apportioned to her. If so, the lower proportion for the Husband is 1% and for the Wife is 99% so the SLP is 100%. It all depends on how Step 3 in para 20 is interpreted and whether there is a choice. If there is a choice, then it would be important to ensure that Step 4 does not reduce the lower proportion in any way which produces an SLP of less than 100%. However, the legislation is not clear.
Note that, even if it were possible to apportion the chargeable interest to the relevant owner’s corresponding partners as suggested, this would not work if the individuals concerned were not connected otherwise than as partners. In that event the SLP would be 51% even though for CGT purposes there had been no disposal. This anomaly highlights the problem where income-sharing ratios differ from capital-sharing ratios.

3.6 General

(a) Application of exemptions and reliefs (para 25)
The exemption from SDLT in FA 2003 Sch 3 para 1 (no chargeable consideration) does not apply to these partnership transactions. Otherwise, however, the SDLT exemptions already do apply, subject to modification in the case of disadvantaged areas relief (para 26), group relief (para 27) and charities relief (para 28).

(b) The only charging provisions (para 29)
Except as charged under paras 10, 14 or 17 the acquisition of an interest in a partnership is not a chargeable transaction, whether or not the partnership property includes land.

(c) Notification (para 30)
The acquisition of a partnership interest under para 14 or para 17 is a notifiable transaction only if SDLT is chargeable at 1% or more.

(d) Continued application of Stamp Duty on transfers of partnership interests
Para 31 provides for the continuation of Stamp Duty on instruments transferring a partnership interest, but applies paras 32 and 33 to modify the consideration. Under para 32 where Stamp Duty is charged on an instrument transferring an interest in the partnership and the relevant partnership property includes an interest in land, the consideration for the transaction is equal to the reduced amount. The reduced amount is defined as the actual consideration less the excluded amount. The excluded amount is a proportion of the net market value of the relevant partnership property immediately after the transfer. Where the person acquiring a partnership share was not previously a partner, the proportion is the partnership share acquired. Where the person was previously a partner, the proportion is the increase in the partnership share.

The net market value of the relevant partnership property is the market value of the interest in land at the transfer date less the amount of any loan secured solely on the interest in land at that date. Where this result is negative it is to be taken as nil. Where the excluded amount is greater than the actual consideration paid, the reduced amount is taken as nil.

Para 33 applies these principles to the extent that the relevant partnership property includes stock or marketable securities.

(e) Statute fails to reflect parliamentary intention?
Para 33 is intended to charge the transfer of an interest in a partnership which holds shares to the same amount of Stamp Duty which would have been chargeable on a direct transfer of the shares. The background note at Report Stage states ‘This amendment, whilst retaining the modified charge to stamp duty, restricts the charge to those elements of a transfer of partnership interest which would have had stamp duty or stamp duty reserve tax applied to them if the transaction was an actual purchase of those items’.

Assume that the shares in the partnership are worth £100,000 and that 10% interest is changing hands, one would expect a Stamp Duty charge of £100,000.

However, para 33(3) states the consideration for the deemed transfer to be equal to the net market value of the shares immediately after the transfer less the excluded amount. The net market value is the market value of the shares less debts secured (para 33(6)). The excluded amount is a proportion of the net market value, which is the share changing hands (para 33(5)). On that basis, Stamp Duty seems to be charged on £90,000, which does not appear to accord with the explanatory note. The problem seems to lie in prescribing a charge equal to the Stamp Duty which would be chargeable if the instrument were an instrument effecting a transfer of the shares comprised in the partnership property.

Again, the Revenue have been asked for their view.

(f) Amendment 215 fails to counter the avoidance
Sch 41 para 32 retains the Stamp Duty charge on transfers of partnership interests irrespective of whether they hold (chargeable) interests in land. The purpose of retaining the Stamp Duty charge is to guard against avoidance by the transfer of chargeable securities within a partnership wrapper. The intention of amendment No. 215 inserting new para. 24A into Sch 39 seems to be to limit the Stamp Duty charge on transfer of a securities-owning partnership to the amount which would be charged on a direct transfer of those securities.

However, the amendment is deficient in two respects. First, it fails to exempt from charge partnerships which do not own securities (although it was intended to provide such an exemption). Second, the method of calculation of the Stamp Duty charge has been expressed incorrectly, so that the amount of Stamp Duty will be inversely proportional to the interest in the partnership transferred. In other words, if a 100% interest in a partnership is transferred, the Stamp Duty charge will be zero. As a result of the second error, the retention of the Stamp Duty charge will become wholly ineffective as a means of combating the avoidance feared by the Government.

The Stamp Office is aware of the faults in the legislation. It is understood that in relation to the first it proposes to apply the legislation as though it said what the Stamp Office intended it to say. With regard to the second error, the Stamp Office threatens to take further action if the feared avoidance emerges.

All this is a result of hasty processing of legislation without due opportunity for review and debate.

(Taxation 5.8.04 p484, letter by Kevin Griffin of Ernst & Young LLP)

(g) Interpretation: partnership property and partnership share (para 34)
Partnership property is an interest or right held by or on behalf of the partnership or the members of the partnership for the purposes of the partnership business. A person’s partnership share is the proportion in which he is entitled to share in the income profits of the partnership.

(h) Interpretation: transfer of chargeable interest to a partnership (para 35)
Any case where a chargeable interest becomes partnership property is a transfer of a chargeable interest to the partnership.

(i) Interpretation: transfer of interest in a partnership (para 36)
There is a transfer of an interest in a partnership where arrangements are made either such that the partner transfers part or the whole of his interest as a partner to another person or such that a person becomes a partner and an existing partner reduces his interest or ceases to be a partner.

(j) Interpretation: transfer of a chargeable interest from a partnership (para 37)
There is a transfer of a chargeable interest from a partnership where a chargeable interest that was partnership property ceases to be partnership property or where a chargeable interest is granted or created out of partnership property and that interest is not partnership property.

(k) Interpretation: market value of lease (para 38)
In determining the market value of the lease for purposes of paras 10 or 18, an obligation of the tenant is to be taken into account only if (a) it is one of those listed in FA 2003 Sch 17A para 10(1) as not counting as chargeable consideration or (b) it is an obligation to make a payment to a person.

(l) Interpretation: connected persons (para 39)
The definition of connected persons in TA 1988 s839 is adopted.

(m) Interpretation: arrangements (para 40)
Arrangements are defined as including any scheme, agreement or understanding, whether or not legally enforceable.

Matthew Hutton

September 2004