Patrick Cannon, Barrister, considers the Stamp Duty Land Tax position in respect of partnership interests.
Acquisition not Chargeable Except as Specifically Provided
The acquisition of an interest in a partnership is not chargeable with SDLT unless it is specifically caught by para 10 (transfer of chargeable interest to a partnership), para 14 (transfer of partnership interest) or para 17 (transfer of partnership interest pursuant to earlier arrangements) Sch 15 FA 2003: para 29 Sch 15 FA 2003.
Poor drafting of the relevant provisions led to some confusion over what amounted to the transfer of a partnership interest for SDLT purposes. To some extent clarity has now been supplied with the current version of para 36 Sch 15 FA 2003 from 19th July 2007 (REPLACE ed by section 72(10) FA 2007).The transfer of an interest in a partnership is defined as follows –
‘For the purposes of this Part of this Schedule, where a person acquires or increases a partnership share there is a transfer of an interest in the partnership (to that partner and from the other partners)’: para 36 Sch 15 FA 2003.
(It should be noted that original version of para 36 Sch 15 FA 2003, which arguably did not catch increases in partnership shares on their own, continues to apply to properly investment partnerships established before 19th July 2007 if the partnership has not since then acquired a chargeable interest and SDLT was paid in respect of each chargeable interest acquired before then by reference to chargeable consideration of not less than market value: s 72(14) FA 2007).
A ‘partnership share’ is defined as the proportion in which a partner is entitled to share in the income profits of the partnership: para 34(2) Sch 15 FA 2003 and see 3.1.
The phrase ‘transfer of an interest in a property–investment partnership’ is used in para 14 (1) Sch 15 FA 2003 and although it is not expressly defined in the SDLT provisions, in common law it means all the rights and attributes attaching to a partner including the right to an allocation of regular income and capital profits as agreed, rights in the relation to the management of the partnership and the bundle of equitable rights of account that entitle the partner to a share in any surplus available on a winding up after creditors and other liabilities have been settled. In other words the phrase encapsulates a broad collection of proprietary, contractual and equitable rights. The phrase ‘partnership share’ is quite specific and is limited to a partner’s current entitlement to income profits being just one element of the latter. However despite this, there is now a deemed transfer of an interest in a partnership whenever a person acquires or increases a partnership share i.e. an entitlement to the income profits of the partnership. It follows therefore than an actual transfer of an interest in a property investment partnership will be chargeable as will an acquisition or increase in the entitlement to the income profits of the partnership.
Why did HMRC alter the definition of the transfer of an interest in a partnership to include increases in a partnership share? The correct approach to the interpretation of the original legislation left scope for value shifting amongst partners and “transfers” by dilution of a partner’s existing interest without an SDLT charge. However that result was simply a consequence of the prescriptive nature of the drafting of Sch 15 FA 2003. It occurs to the author that HMRC would have been much better off adopting the approach taken in capital gains tax and its application to partnerships where they have been content to rely on a statement of practice (D12) since 1975. This would supply the desired flexibility to adapt the charge to particular situations as they arise instead of locking them into unforeseen results because of the highly particularised drafting.
It is interesting to notice that under the original provisions, HMRC thought that even though a change in the income profit share was a transfer of a partner’s interest there would usually be no consideration given and so the issue would rarely arise. This was wrong because the time and labour contributed by the partner benefiting from the increased income share constitutes consideration in money or money’s worth (after all it has led to an increase in profit share) and therefore tax would have arisen if HMRC’s basic position was correct.
What “Transfers” are Chargeable?
For the transfer of a partnership interest to be chargeable to SDLT:
(a) the transfer is of an interest in a property–investment partnership: para 14(1)(a) Sch 15 FA 2003; and
(b) the relevant partnership property includes a chargeable interest: para 14(1)(c) Sch 15 FA 2003
[Note: For transfers before 2pm on 6th December 2006 it was also a condition that consideration was given for the transfer (either actual consideration or in the form of a withdrawal of money by a person reducing his partnership interest) and between this date and 19th July 2007 either consideration was given or the transferee was a person other than an individual connected with the transferor: para 14(1)(b) Sch 15 FA 2003 repealed by section 72(6) FA 2007.
The repeal of para 14(1)(b) Sch 15 FA 2003 does not however apply to a property investment partnership established before 19th July 2007 if it does not acquire a chargeable interest since then and SDLT was paid in respect of each chargeable interest acquired before then by reference to chargeable consideration if not less than market value: section 72(14) FA 2007.]
In such a case the transfer is to be taken “for the purposes of this Part” to be a land transaction and it is “a chargeable transaction”: para 14(2) Sch 15 FA 2003. It seems that the reference to “this Part” in para 14(2) Sch 15 FA 2003 is a reference to Part 4 of the FA 2003 ie the entire SDLT provisions and not just to Part 3 of Sch 15 FA 2003.
The “chargeable consideration” is taken to be equal to a proportion of the market value of the relevant partnership property (regardless of any actual consideration). That proportion equates to the share of the incoming partner or the increase in the share of an existing partner: para 14(6) and (7) Sch 15 FA 2003.
The “relevant partnership property” must include a chargeable interest which is every interest in land held as partnership property other than any interest transferred to the partnership in connection with the transfer and a market rent lease excluded under para 15 Sch 15 FA 2003.
[The following two paragraphs are relevant only for transfers occurring either before 19th July 2007 or in respect of which the repeal of para 14(1)(b) Sch 15 FA 2003 does not apply, and have been retained to assist readers in relation thereto.]
What “Transfers” are not Chargeable?
Absence of Consideration
Unless the transferee is a person, other than an individual, who is connected with the transferor, the “transfer” will not be chargeable in the absence of consideration (but see 4.1 for the one exception to this where the gift of a partnership share is chargeable with SDLT if it is part of the same arrangement as the original land contribution: para 17 Sch 15 FA 2003). Consideration for this purpose is either actual consideration or a withdrawal of money or money’s worth by the outgoing or reducing partner: see 4.1 above. Therefore although the admission of a new partner and the retirement or reduction of the interest of an associated existing partner is a deemed “transfer” to the incoming partner, no SDLT can arise if there is no withdrawal of money or money’s worth by the outgoing or reducing partner (and the transferee is not a person, other than an individual, connected with the transferor). The retirement of a partner and withdrawal of his capital by itself will not be chargeable with SDLT if it is not part of an arrangement for the admission of a new partner. If the retirement coincides with the admission of a new partner it should be possible in appropriate cases to take the view that there is no “arrangement” especially where the partnership can pay out the retiring partner without relying on the capital contributed by the incoming partner. This will be relevant to the many professional partnerships which admit and retire partners on an annual basis. It is also possible to avoid a “transfer” in the case of a property investment partnership in certain situations by allowing the “outgoing” partner’s interest to be diluted and avoiding an actual withdrawal of funds by him. If the partnership has been created on the basis of a high proportion of loan capital such that the founding partners’ equity capital is low, the admission of new investors taking the majority of the interest in the partnership and thus diluting the founding partners’ interest should not concern them or require them to withdraw what equity capital they have invested in the partnership business. In this way investors can be offered shares in property investment partnerships without causing the “transfer” of a partnership interest to them for SDLT.
Is Partnership Debt Consideration?
It is surprising that HMRC do not have a settled view on whether monies owed by the partnership at the time of the “transfer” can form consideration given by the incoming partner. It appears that HMRC do regard debt secured on land held by the partnership as consideration because of para 8 (1A) Sch 4 FA 2003 which deems there to be an assumption of debt by the purchaser which constitutes consideration. It is unclear however whether HMRC regard other debt such as unsecured trade debt to be consideration under para 8 Sch 4 FA 2003. Depending upon the governing law and the circumstances it may be that the incoming partner is not liable for such debts in any event and so the issue will not arise. A purposive approach to the SDLT partnership provisions would suggest that only debt secured on the land and assumed by an incoming partner should count as consideration because of the principle that a chargeable interest held by a partnership is treated as held by the partners: para 2(a) Sch 15 FA 2003. On this approach trade and other debts unrelated to the land should not affect the SDLT charged by reference to the land. In the case of a partner whose liability is limited under the Limited Partnerships Act 1907 or equivalent legislation although the incoming partner’s actual liability is limited the presence of any consideration is sufficient to attract an SDLT charge on the “chargeable consideration”. See also 9.4.6 for an interesting argument as to why all partnership debt should be ignored as consideration.
[The above two paragraphs are relevant only for transfers occurring either before 19th July 2007 or in respect of which the repeal of para 14(1)(b) Sch 15 FA 2003 does not apply, and have been retained to assist readers in relation thereto.]
Exclusion of Market Rent Leases
If the transfer of a partnership interest is a chargeable transaction the chargeable consideration for SDLT is taken to be equal to a proportion of the market value of the “relevant partnership property”. This applies regardless of whether any consideration given i.e. a market value based charge arises even if the actual consideration is nil or minimal: para 14(1) Sch 14 FA 2003 (see 9.4.7). The “relevant partnership property” is every chargeable interest held as partnership property immediately after the transfer other than any interest transferred to the partnership in connection with the transfer of a “market rent” lease: para 14(5) Sch 14 FA 2003. A “market rent” lease is a lease held as partnership property if four conditions are met:
(a) no chargeable consideration other than rent has been given for the grant of the lease and no arrangements are in place at the time of the transfer for any chargeable consideration other than rent to be given for the grant;
(b) the rent payable under the lease as granted was a market rent at the time of grant;
(c) the term of the lease is 5 years or less, or if more the lease provides for a rent review at least every 5 years and the rent payable following the review must be market rent at the review date; and
(d) there has been no change to the lease since grant such that immediately after the change the rent payable is less than a market rent.
In relation to (c) above, it appears that leases which provide for upward only rent reviews cannot be market rent leases for SDLT because the rent following the review must be a market rent and with an upward only rent review this will not be the case if market rents have fallen. This rule may have been intended to discourage the inclusion of upward only rent reviews in new leases. It is understood that HMRC do not take this point however.
Transfer Pursuant to Earlier Arrangements
There is an anti-avoidance rule that charges SDLT on a proportion of the market value of land contributed to a partnership if at the time of the contribution of land to the partnership there were arrangements in place for a subsequent transfer of an interest in the partnership and that transfer is not otherwise chargeable with SDLT: para 17 Sch 15 FA 2003. In such a case the partnership transfer is treated as a land transaction and is a chargeable transaction. The proportion of the market value of the land contributed which is chargeable with SDLT is equal to the partnership share transferred. The original contribution of the land and the partnership transfer are to be treated as linked transactions: para 17(5) Sch 15 FA 2003 (and see Linked Transactions). Normally the partnership transfer will anyway be chargeable with SDLT especially since the 19th July 2007 when the condition that consideration be given for a transfer of a partnership interest before SDLT could arise was removed, and so the anti-avoidance rule will rarely apply: para 14 Sch 15 FA 2003. The anti-avoidance rule is probably there out of an abundance of caution by HMRC. If the would-be partnership transfer is in the farming context and forms part of the same arrangement as the original land contribution then an SDLT charge will arise with reference to the proportion of the market value of the land equivalent to the partnership share gifted. The moral here would be to ensure that where possible the transferee (if an individual connected with the contributor) is a partner at the time of the land contribution so that the SDLT charge (if any) on the contribution ignores the proportion attributable to the recipient.
In reading the provisions of Sch 15 FA 2003 it is necessary to distinguish between the actual consideration given for the acquisition of a partnership interest and the “chargeable consideration”. This is because it is the “chargeable consideration” that determines the extent of the SDLT charge on the acquisition. The “chargeable consideration” rather than the actual consideration determines whether a land transaction is notifiable.
Exchanges and Partitions
The acquisition of an interest in a partnership owning a major interest in land in exchange for a land transaction with an existing partner is treated as if the partnership interest was a major interest in land: para 16 Sch 15 FA 2003. This has the effect of imposing a SDLT charge on the market value on both the partnership interest (without limitation it seems to the value of the land) and the associated land transaction under the SDLT exchange rules in para 5 Sch 4 FA 2003. Each party is liable to SDLT on the market value of what he acquires. The relief for partitions in para 6 Sch 15 FA 2003 is specifically disapplied in this situation.
The contribution of land to a partnership and the distribution of land out of a partnership are land transactions in their own right and so the rules as to when such transactions are notifiable for SDLT under s77 FA 2003 can apply per se. However, the transfer of an interest in a partnership owning land is not treated as a land transaction per se (despite the “look through” provisions in para 2 Sch 15 FA 2003) because both para 14 and para 17 Sch 15 FA 2003 which impose an SDLT charge on such transfers find it necessary expressly to state that such transfers shall be land transactions. As a result it is therefore necessary to provide specifically as to when these deemed land transactions shall become notifiable for SDLT purposes. To be notifiable, the consideration for such transactions must exceed the zero rate threshold and “the consideration” here means the “relevant consideration” for s55(2) FA 2003 which means the “chargeable consideration”: s55(3)(b) FA 2003 (or the “relevant rental value” for Sch 5 FA 2003 (lease rents)). Therefore it is the “chargeable consideration” rather than any actual consideration which determines whether the transfer of the partnership interest is notifiable.
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. http://www.patrickcannon.net/