Any land transaction entered into by a partnership as purchaser, where the transaction is not with
is covered by Parts 1 and 2 of Schedule 15. The transaction is treated as being entered into by the partners jointly as purchaser.
In addition to those transactions chargeable under Parts 1 and 2 of Schedule 15, Part 3 of Schedule 15 (introduced by Finance Act 2004 and effective from 22 July 2004) charges transactions where the effective date of the transaction is on or after 22 July 2004 and
1. a chargeable interest is transferred to a partnership by (SCH15/PARA10)
There is a transfer of a chargeable interest into a partnership in any case where a chargeable interest becomes partnership property (see SDLTM35100 for what is partnership property).
2. a chargeable interest is transferred from a partnership to (SCH15/PARA14)
There is a transfer of a chargeable interest from a partnership in any case where
The transfer of a chargeable interest includes
(See SDLTM35100 for what is partnership property)
3. an interest in a partnership is transferred to (SCH15/PARA18)
In this case, there are further conditions before the transfer becomes chargeable. These are
There is a charge to Stamp Duty Land Tax where
It is immaterial whether the transaction is to an existing partnership or in connection with the formation of a partnership and applies to all forms of partnership.
FA03/SCH15/PARA35 gives interpretation of when there is a transfer of a chargeable interest into a partnership as any case where a chargeable interest becomes partnership property. See SDLTM35100 for a definition of partnership property.
This means that where a chargeable interest, owned by one or more of the partners (or a person connected with a partner), outside the partnership starts being used for the purposes of the partnership business, there is a transfer into the partnership even if legal ownership does not change.
If rent is not paid for the use of the chargeable interest, it is the chargeable interest held which is transferred. If rent is paid for the use of the chargeable interest, it is the periodic tenancy (lease) so generated which is transferred.
Where the chargeable consideration does not include rent, the chargeable consideration for a transfer of a chargeable interest into a partnership is given by the formula
(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
This means that the charge is on a proportion of the market value of the chargeable interest transferred plus a proportion of any actual consideration for the transfer. See SDLTM33700 for the meaning of actual consideration
The chargeable proportion of the market value is that proportion of the chargeable interest not retained or treated as retained by the transferor(s), defined as
(100 – SLP)%
The chargeable proportion of the actual consideration is that proportion of the chargeable interest retained or treated as retained by the transferor(s), defined as
SLP%
Where SLP is ‘the sum of the lower proportions’.
The total of these two proportions will always be 100%.
If, after the transfer, all the partners are bodies corporate, see SDLTM33900.
Where the chargeable interest transferred into a partnership is a lease at rent, tax is charged on
The Net Present Value of the rent over the term of the lease is determined as usual (see SDLTMXXXXX). Of this amount, the relevant chargeable proportion is chargeable, determined as
(100 – SLP)%
where
SLP is the sum of the lower proportions.
Where there is consideration other than rent, the chargeable consideration also includes consideration given by the formula
(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 chargeable consideration other than rent
If there is no chargeable consideration other than rent, there shall be taken to be chargeable consideration other than rent and it shall be taken to be
RCP x MV
where
RCP is the relevant chargeable proportion and
MV is the market value of the interest transferred
This means that, whether or not consideration other than rent has been paid for a lease, the market value of that lease has to be determined, that is, the premium which would be payable if that lease were granted in the open market.
The relevant chargeable proportion of the market value is given by the formula
(100 – SLP)%
and the relevant chargeable proportion of the actual consideration other than rent is
SLP%
where SLP is the sum of the lower proportions.
The total of these two proportions will always be 100%.
If, after the transfer, all the partners are bodies corporate, see SDLTM33900.
Consideration is only actual consideration where the sum of the lower proportions (SLP see SDLTM33700) is higher than it otherwise would be because the transfer is to a partnership where one or more persons is connected with the transferror.
Thus where a property is transferred by a parent into a partnership of their offspring, the sum of the lower proportions will be 100 and the market value charge will be nil.
If the partnership or partners make a payment to the parent, this payment is actual consideration.
Actual consideration can take the usual forms of consideraiton, that is
It does not matter whether the payment is made by the partnership directly or by the partners individually, if the payment is for the transfer.
This means that there can never be actual consideration whenthe transfer is by a partner into a partnership and there are no connected persons.
The legislation describes the proportion in terms of ‘relevant chargeable proportion’ and defines this in terms of ‘sum of the lower proportions’, SLP. This sum of the lower proportions is the percentage of ownership retained or treated as retained by the transferor(s). There are five steps to determining this figure.
Step One
Identify the relevant owner(s). A person is a relevant owner if
So, to be a relevant owner a person had to own or part own the interest in land immediately before the transaction took place and after the transaction he has to be a partner or connected to a partner. For a discussion of what is meant by connected person for the purposes of this charge, see XXXXX.
Example
Land is owned by A, B, C, D and E in the proportions A: 20%;
B: 10%; C: 25%; D: 30%; E:15%.
This land is transferred into a partnership of A, B, D, F
and G. A is the husband of B and F is the wife of C. The partnership
shares are A: 10%; B:25%; D: 15%; F:30%; G:20%
A and B are both relevant owners as they own part of the
land before the transaction and are also partners in the partnership
after the transaction.
C is also a relevant owner as he part owned the land before
the transaction and is connected to a partner (his wife F)
after the transaction.
D is a relevant owner as he part owned the land before the
transaction and is also a partner in the partnership after
the transaction.
E is not a relevant owner as although he part owned the land
before the transaction, he is not a partner in the partnership
after the transaction nor is he connected to such a partner.
F and G are not a relevant owners. Although they are partners
after the transaction, they did not own any of the land before
the transaction.
Step Two
For each person identified as a relevant owner in step one, you need to identify their corresponding partner or partners. A corresponding partner is someone who is
Example
Continuing the example in step one
A’s corresponding partners are
? A as he is both a partner and a relevant owner and
? B as she is a partner and connected to A (her husband)
B’s corresponding partners are
? B as she is both a partner and a relevant owner and
? A as he is a partner and connected to B (his wife)
C’s corresponding partner is
? F as she is a partner and connected to C (her husband)
D’s corresponding partner is
? D as he is both a partner and a relevant owner
Step Three
For each relevant owner identified at step one, determine the proportion of their entitlement to the interest in land immediately before the transaction. Once this is done, for each relevant owner, apportion this entitlement between that owner’s corresponding partners.
There is no set method of performing this apportionment and it can be carried out to give the best result.
Example
Continuing the example in step two
A’s proportionate entitlement before the transaction
is 20%
B’s proportionate entitlement before the transaction
is 10%
C’s proportionate entitlement before the transaction
is 25%
D’s proportionate entitlement before the transaction
is 30%
A’s 20% is apportioned between his corresponding partners
A and B
B’s 10% is apportioned between her corresponding partners
B and A
C’s 25% is apportioned to his corresponding partner
F
D’s 30% is apportioned to his corresponding partner
D
Initially, to keep things simple, apportion the entitlements A to A, B to B and C to F, so that for the corresponding partners the apportioned entitlements are
A: 20%
B: 10%
F: 25%
D: 30%
Step Four
Find the lower proportions for each corresponding partner. This is the lower of the apportioned entitlement or that partner’s partnership share. Partnership share is discussed further at XXXXX
Example
Continuing the example in step three
For A it is the lower of 20% (apportioned) and 10% (partnership
share) i.e. 10%
For B it is the lower of 10% (apportioned) and 25% (partnership
share) i.e. 10%
For F it is the lower of 25% (apportioned) and 30% (partnership
share) i.e. 25%
For D it is the lower of 30% (apportioned) and 15% (partnership
share) i.e. 15%
Step Five
Add these lower proportions together
Example
Continuing the example in step four, the sum of the lower proportions is 60%.
However, at step three, it is possible to allocate the entitlements to the corresponding partners differently.
Example
Continuing the example from step two, if the apportionments at step three were
A’s 20% is apportioned to A 10% and B 10% (as A and
B are both A’s corresponding partners)
B’s 10% is apportioned to B 10%
C’s 25% is apportioned to F 25%
D’s 30% is apportioned to D 30%
So that the entitlements are now
A: 10%
B: 20%
F: 25%
D: 30%
Step four now becomes
A: lower of 10% (apportioned) or 10% (partnership share)
i.e. 10%
B: lower of 20% (apportioned) or 25% (partnership share) i.e.
20%
F: lower of 25% (apportioned) or 30% (partnership share) i.e.
25%
D: lower of 30% (apportioned) or 15% (partnership share) i.e.
15%
Step five now gives the result that the sump of the lower proportions is 70%. This is as a result of a more efficient apportionment of relevant owners ownership share.
This can be seen to be the best allocation and is equivalent to the part of the property that has changed hands:
D owned 30% and now owns 15% i.e. a reduction of 15%
E owned 15% and now owns nothing i.e. a reduction of 15%
giving a total reduction in ownership of 30%
Another way of looking at it is to determine the increases in ownership in the partnership:-
A and B between them owned 30% before and own 35% of the
partnership an increase of 5%
C owned 25% before and (through F) owns 30% of the
partnership an increase of 5%
D’s ownership has decreased (from 30% to 15%) so ignore
E’s ownership has decreased (from 15% to 0%) so ignore
F’s ownership is dealt with through C
G’s owned 0% before and owns 20% of the partnership
an increase of 20%
giving a total increase in ownership of 30%
For the purposes of this calculation, where there are beneficial joint tenants (or in Scotland joint owners), they shall be treated as beneficial tenants in common (in Scotland owners in common) in equal shares.
Where, after a transfer of a chargeable interest into a partnership, all the partners in that partnership are bodies corporate, there is a further test to perform.
Where the sum of the lower proportions is 75% or more, no reduction is chargeable proportion is permitted.
Thus, where the consideration for the transfer does not include rent, the charge is the market value of the chargeable interest transferred (FA03/SCH15/PARA13(3)).
Where the consideration for the transfer includes rent, the chargeable consideration is the Net Present Value of the rent over the term of the lease plus the market value of the lease.
Examples of chargeable consideration calculations for transfers of freehold property or assignments of leasehold property
The chargeable proportion of the market value is (100 – SLP)%, where SLP is the sum of the lower proportions.
The chargeable proportion of any actual consideration is SLP%, where SLP is the sum of the lower proportions.
It is the total of these two figures which is the chargeable consideration for the transaction.
Example 1
This example assumes that income entitlement follows capital entitlement.
A and B are not connected and are in partnership with income entitlements 50:50. A transfers a property with a market value of £1 million into the partnership at a time when the partnership capital also stands at £1 million. After the transfer A’s income entitlement is 75% (being equal to his capital entitlement of the original £500,000 plus the property of £1 million) of the partnership assets and B’s capital entitlement is 25% (being his original £500,000). The partnership assets are now £2 million.
As no actual consideration has been given, the charge is on market value and is
(100 – SLP%) of market value.
SLP is 75% and the charge is, therefore, 25% of market value of the property transferred, that is chargeable consideration of £250,000.
Example 2
This example assumes that income entitlement always mirrors capital entitlement.
A and B are not connected and are in partnership with capital entitlements 50:50. A transfers a property with a market value of £1 million into the partnership at a time when the partnership capital also stands at £1 million. A also receives £500,000 from the partnership. After the transfer A’s capital entitlement is 66 2/3% (being his original £500,000 plus the property less the £500,000 payment) of the partnership assets (as is his income share) and B’s capital entitlement is 33 1/3% (being his original £500,000) (as is his income share). The partnership assets are now £1.5 million.
The payment of £500,000 is consideration. However, as it is all a withdrawal of capital from the capital account it does not count as actual consideration. Thus the charge is only on market value and is
(100 – SLP)% of market value.
SLP is 66 2/3% and the charge is, therefore, 33 1/3% of market value of the property transferred, that is chargeable consideration of £333,333.
Example 3
This example assumes that income entitlement always mirrors capital entitlement.
A, B and C
There is a charge to Stamp Duty Land Tax where a chargeable interest is transferred
FA03/SCH15/PARA37 gives interpretation of when there is a transfer of a chargeable interest from a partnership as any case where
Partnership property is defined in FA03/SCH15/PARA34(1) as:
‘an interest or right held by or on behalf of a partnership, or the members of a partnership, for the purposes of the partnership business.’
This means that where a chargeable interest, owned by one or more of the partners outside the partnership and used for the partnership business, ceases being used for the purposes of the partnership business, there is a transfer from the partnership even if legal ownership does not change.
If rent was not paid for the use of the chargeable interest, it is the chargeable interest held which is transferred. If rent was paid for the use of the chargeable interest, it is the periodic tenancy (lease) so generated which is transferred.
Where the chargeable consideration does not include rent, the chargeable consideration for a transfer of a chargeable interest from a partnership is given by the formula
(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
This means that the charge is on a proportion of the market value of the chargeable interest transferred plus a proportion of any other consideration for the transfer. The other consideration consists of anything deemed to be chargeable consideration within the meaning of FA03/SCH4 see XXXXX
The chargeable proportion of the market value is that proportion of the chargeable interest not retained or treated as retained by the transferee(s), defined as
(100 – SLP)%
The chargeable proportion of the actual payment is that proportion of the chargeable interest retained or treated as retained by the transferee(s), defined as
SLP%
where SLP is the ‘sum of the lower proportions’.
The total of these two proportions will always be 100%.
Where there is a distribution of chargeable interests because a partnership has dissolved or otherwise ceased to exist, those chargeable interests shall be treated as remaining partnership property until they are distributed.
If, before the transfer, all the partners were bodies corporate, see XXXXX
Where the chargeable interest transferred from a partnership is a lease at rent, tax is charged on
The Net Present Value of the rent over the term of the lease is determined as usual (see SDLTMXXXXX). Of this amount, the relevant chargeable proportion is chargeable, determined as
(100 – SLP)%
where
SLP is the sum of the lower proportions.
Where there is consideration other than rent, the chargeable consideration also includes consideration given by the formula
(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 chargeable consideration other than rent
If there is no chargeable consideration other than rent, there shall be taken to be chargeable consideration other than rent and it shall be taken to be
RCP x MV
Where
RCP is the relevant chargeable proportion and
MV is the market value of the interest transferred
This means that, whether or not consideration other than rent has been paid for a lease, the market value of that lease has to be determined, that is, the premium which would be payable if that lease were granted in the open market.
The relevant chargeable proportion of the market value is given by the formula
(100 – SLP)%
and the relevant chargeable proportion of the actual consideration
other than rent is
SLP%
where SLP is the sum of the lower proportions.
The total of these two proportions will always be 100%.
If, before the transfer, all the partners were bodies corporate, see XXXXX
The actual consideration to be taken into account is anything treated as consideration under FA03/SCH4 but will usually consist of some or all of
The usual rules for determining the amount of the consideration apply, for example, it would be the actual amount of any monetary payment made or the market value of the property given in exchange.
Debt will only be taken to be actual consideration where the liability for the debt of the owner (or owners) who was a corresponding partner is increased. Thus, where a chargeable interest is transferred from a partnership to a partner and he was jointly and severally liable for the debt secured on the chargeable interest in the partnership, the assumption of (full of joint and several) liability for the debt outside the partnership will not count as chargeable consideration.. Where the property becomes owned by someone connected with the partner (who is not or was not a partner) and becomes liable for the debt, any debt assumed will be treated as actual consideration.
Examples
1) An A and B partnership owns property on which there is secured debt of £1,000 000. It is agreed to transfer the property into the sole name of A, who assumes sole responsibility for the debt. As A was responsible for the whole debt before the transaction (jointly and severally with partner B) and is also responsible for the whole debt after the transaction, this assumption of debt will not be treated as chargeable consideration. A will only be liable to Stamp Duty Land Tax on a proportion of the market value of the chargeable interest transferred.
2) An A and B partnership owns property on which there is secured debt of £1,000,000. It is agreed to transfer the property into the sole name of C, who is connected to A, with C assuming sole responsibility for the debt. As C was not responsible for the debt before the transaction and has become responsible, the assumption of debt will be chargeable. C will be liable to Stamp Duty Land Tax on a proportion of the market value of the chargeable interest transferred and also on a complimentary proportion of the debt assumed.
The legislation describes the proportion in terms of ‘relevant chargeable proportion’ and defines this in terms of ‘sum of the lower proportions’, SLP. This sum of the lower proportions is the percentage of ownership retained or treated as retained by the transferee(s). There are five steps to determining this figure.
Step One
Identify the relevant owner(s). A person is a relevant owner if
So, to be a relevant owner a person has to own or part own the interest in land immediately after the transaction took place and before the transaction he had to be a partner or connected to a partner. For a discussion of what is meant by connected person for the purposes of this charge, see XXXXX.
Example
A partnership of A, B, C, D and E own land. The partnership shares are A: 10%; B: 35%; C: 5%; D: 30% and E: 20%.
This land is transferred into the ownership (as tenants in common) of C, F and G who own the land in the ratios C: 40%; F: 40% and G 20%.
B is the wife of A. C is their daughter and F is their son.
C is a relevant owner as she is entitled to a proportion
of the interest after the transaction and was a partner in
the partnership before the transaction.
F is a relevant owner as he is entitled to a proportion of
the interest after the transaction and is connected to someone
who was a partner before the transaction (A and B his parents
and C his sister).
G is not a relevant owner as although he is entitled to a
proportion of the interest after the transaction, he is not
a partner before the transaction or connected to someone who
was a partner before the transaction.
A and B are not relevant owners as although they are partners
immediately before the transaction they are non entitled to
a proportion of the interest after the transaction. Their
connection to C and F who do have an entitlement to a proportion
of the interest after the transaction is immaterial.
D and E are not relevant owners as although they are partners
immediately before the transaction they are non entitled to
a proportion of the interest after the transaction.
Step Two
For each person identified as a relevant owner in step one, you need to identify their corresponding partner or partners. A relevant owner’s corresponding partner is someone who is
Example
Continuing the example in step one
C’s corresponding partners are
F’s corresponding partners are
Step Three
For each relevant owner identified at step one, determine the proportion of their entitlement to the interest in land immediately after the transaction. Once this is done, for each relevant owner, apportion this entitlement between that owner’s corresponding partners.
There is no set method of performing this apportionment and it can be carried out to give the best result.
Example
Continuing the example in step two
C’s proportionate entitlement after the transaction
is 40%
F’s proportionate entitlement after the transaction
is 40%
C’s 40% is apportioned between her corresponding partners
A, B and C
F’s 40% is apportioned between his corresponding partners
A, B and C
Initially, to keep things simple, apportion the entitlements C to C and F to A, so that for the corresponding partners the apportioned entitlements are
A: 40%
B: nil
C: 40%
Step Four
Find the lower proportions for each corresponding partner. This is the lower of the apportioned entitlement of that partner’s partnership share. Partnership share is discussed further at XXXXX. When determining the apportioned entitlement, it is the total of all the apportionments to that partner than should be taken into account.
Example
Continuing the example in step three
For A it is the lower of 40% (apportioned) and 10% (partnership
share) i.e. 10%
For B it is the lower of 0% (apportioned) and 35% (partnership
share) i.e. 0%
For C it is the lower of 40% (apportioned) and 5% (partnership
share) i.e. 5%
Step Five
Add these lower proportions together
Example
Continuing the example in step four, the sum of the lower proportions is 15%.
However, at step three, it is possible to allocate the entitlements to the corresponding partners differently.
Example
Continuing the example from step two, if the apportionments at step three were
C’s 40% is apportioned to C 5% and to A 35%
F’s 40% is apportioned to B 40%
So that the entitlements are now
A: 35%
B: 40%
C: 5%
Step four now becomes
A: lower of 35% (apportioned) or 10% (partnership share)
i.e. 10%
B: lower of 40% (apportioned) or 35% (partnership share) i.e.
35%
C: lower of 5% (apportioned) or 5% (partnership share) i.e.
5%
Step five now gives the result that the sum of the lower proportions is 50%. This is as a result of more efficient apportionment of relevant owners ownership share.
This can be seen to be the best allocation and is equivalent to the part of the property that has changed hands:
D owned 30% and now owns nothing, a reduction of 30%
E owned 20% and now owns nothing, a reduction of 20%
Giving a total reduction in ownership from the partnership
of 50%
This can also be calculated as
As A, B and C are all connected, their ownership in the partnership
is 50%
C and F are also connected and their ownership is now 80%
i.e. an increase in ownership from that in the partnership
of 30%
G didn’t own in the partnership and now owns 20% so
it is a 20% increase
Total increase in ownership is 50%
What is the partnership share attributable to a partner
FA03/SCH15/PARA21 and FA03/SCH15/PARA22 act to determine the partnership share attributable to a partner and can be considered to act via a series of questions to determine what share is attributable. In considering these questions, regard should be had to the definition of ‘relevant chargeable interest’, which is either
The partnership share is zero unless
Where the partnership share is not zero, FA03/SCH15/PARA22 is used to determine what the figure is by a series of steps.
Step One
Was the chargeable interest transferred to the partnership before 20 October 2003
a) What is ‘partnership interest’?
The phrase ‘partnership interest’ (or ‘interest in a partnership’ as used in FA03/SCH15/PARA14(1)(a)) refers to that bundle of rights and obligations assumed by a partner in a partnership. For the purposes of the charge, we are interested in those rights which include, but are not limited to
b) When is there a transfer of an interest in a partnership
FA03/SCH15/PARA36 details those occasions when there is a transfer of an interest in a partnership.
This shows that there will be a transfer of an interest in a partnership when arrangements are entered into whereby
The word ‘transfer’ in the first bullet includes those arrangements where a partner elects to give up (part of) his entitlement to the capital of a partnership and, in consequence of this action, another person’s entitlement is enhanced or created.
Arrangements are defined in FA03/SCH15/PARA 40 as including ‘any scheme, agreement or understanding, whether or not legally enforceable’. It thus has a wide meaning.
This is the case where A (a partner) transfers (some of) his interest as partner to B (who may or may not already be a partner),.
For A to transfer some of his interest as partner, that interest must be reduced after the transfer and B’s interest must be increased after the transfer. Although the term ‘interest as partner’ is not defined, it is regarded as the cash equivalent of a partner’s partnership interest. This means it is equivalent to the profit his share of the partnership entitles him to and the capital his share of the partnership entitles him to on dissolution (which may not necessarily be the same).
So, a transfer under Paragraph 36(a) is one where the transferring partner’s cash interest reduces and another persons increases as a consequence of that reduction, the comparison being made with their interests before the transaction.
This is the case where A reduces (partially or fully) his interest in the partnership and B becomes a partner.
The term ‘interest in the partnership’ is not defined, but is regarded as the percentage interests a partner has in the profits and net assets of the partnership (which may not be the same).
Thus a transfer under Paragraph 36(b) is one where the transferring partner’s proportionate interest in the profits or capital of the partnership reduces as a consequence of arrangements to introduce another partner.
For the transfer of an interest in a partnership to be chargeable to Stamp Duty Land Tax, there are three conditions set out in FA03/SCH15/PARA14(1). They are:
Consideration is regarded as given for a transfer
Partnership property is any interest or right held by or on behalf of a partnership, or the members of a partnership, for the purposes of partnership business. This means that property held by one of the partners and used for the purposes of the partnership business is partnership property (see FA03/SCH15/PARA34(1) and XXXXX)
Relevant partnership property is every chargeable interest held as partnership property immediately after the transfer except
A market rent lease is excluded from relevant partnership property for the purposes of determining the charge on transfer of an interest in a partnership. To be treated as a market rent lease there are four conditions
either
For agricultural tenancies, it is usual for the rent that a person will offer for the grant of a tenancy in the open market to be higher than the rent which the agricultural tribunal would set following a dispute following a review for a tenant in situ. It is appropriate, in these cases, to treat the market rent for the grant of a lease and the market rent for a tenant in situ as different, as the market rent for a tenant in situ can be determined by reference to the agrigultural tribunal. Thus, for agricultural tenancies, the market rent for the grant of a tenancy is the rent which that grant would command in the open market and for a tenant in situ, on review, is the rent which would be set by the agricultural tribunal.
The chargeable consideration for a transfer of an interest in a partnership is a proportion of the market value of the relevant partnership property where that proportion is
Partnership share at any time is the proportion in which a partner is entitled at that time to share in the income profits of the partnership.
For these purposes, the income profits are the entire profits of the partnership derived from income, irrespective of whether that income has to be allocated in specific ways or whether certain partners have prior allocation of profits from various sources.
Examples
1) A three person equal partnership (A-B-C) has profits of £150,000 and partnership capital of £1,500,000. A wishes to leave the partnership and B and C agree to buy A’s interest equally between them, each paying A £250,000.
Here, there are two transfers under Paragraph 36(a) as partner A has reduced his interest (to nil) and B and C increased their respective interests, the arrangements being for the payment of £250,000 by each of partners B and C. As they have each given money or money’s worth to acquire that interest (they have paid him for his interest), these transactions are (separately) chargeable by virtue of Paragraph 14(4)(a). The chargeable consideration in each case is equivalent to the proportion of the market value of the partnership property determined by the increase in their share of the partnership profits which, in each case is 16.7%. Thus if the market value of the partnership property was £1,200,000, the charge on B and C would be on £200,000 each i.e. £2,000.
There is no transfer under Paragraph 36(b) as no-one has become a partner.
2) A three person equal partnership (A-B-C) has profits of £150,000 and partnership capital of £1,500,000. A wishes to retire and sells his interest to D for £450,000.
This is a transfer under Paragraph 36(a) as partner A has reduced his interest (to nil) under arrangements to transfer that interest to D for £450,000. As D has given money or money’s worth to acquire that interest, this transaction is chargeable by virtue of Paragraph 14(4)(a). The chargeable consideration for D is equivalent to the proportion of the market value of the partnership property determined by the increase in his share of the partnership profits. Before the transaction D had no share (as he wasn’t a partner) and after the tranaction he has a 1/3rd share, so the proportion of the market value of the partnership property on which he is chargeable is 33.3%. Thus, if the market value of the partnership property was £900,000 he would be chargeable on £300,000 i.e. £6,000.
Although there is a transfer under paragraph 36(b) (as the arrangements included D becoming a partner and A reducing his interest in the partnership), there is no chargeable transfer under Paragraph 14(4)(b) as partner A did not withdraw any money or money’s worth from the partnership.
3) A three person equal partnership (A-B-C) has profits of £150,000 and partnership capital of £1,500,000. Partner A retires, withdrawing his capital. The partnership continues as a two person equal partnership (B-C).
This is not be a transfer under Paragraph 36(a) as the remaining partners still have the equivalent of £500,000 of net assets and with the reasonable prospect of profits declining in line with net assets, the monetary equivalent of £50,000 profits each.
This is not a transfer under Paragraph 36(b) as no-one has become a partner.
If there were arrangements in place such that B and C increased their partnership capital to allow A to withdraw his, this would be chargeable by virtue of Paragraph 14(4)(a) as these arrangements would be the purchase of (part of) A’s share. For example, if the partnership only had available cash or other assets of £300,000 and B and C contributed an extra £100,000 cash each to the partnership, thus allowing A to withdraw his £500,000, this can be seen to be a purchase of £100,000 of A’s interest by each of B and C. B’s and C’s interest in the partnership capital is now £600,000 each and thus there would be a transfer under Paragraph 36(a). In this case the chargeable consideration for each of B and C would be the difference in their profit share as a proportion of the market value of the partnership property. This difference is 16.7% of the market value of the partnership property each.
This would also apply to the case where arrangements were entered into whereby the funding of A’s retirement extended of a period. In the example above, where the partnership could only afford to pay A £300,000 for his interest worth £500,000, if there were arrangements entered into whereby A retired, taking the available £300,000 with the balance being left in the partnership as a loan from A (effectively being a withdrawal of £500,000 by A with an immediate loan back to the partnership of £200,000 by A), this would be chargeable by virtue of paragraph 14(4)(a) as the only way the loan could be repaid is by B and/or C transferring cash to A. The arrangements might be that B and C left sufficient profits in the partnership over a five year period to enable A’s loan to be repaid. These arrangements would be caught as the leaving of profit in the partnership to enable repayment of the loan from A is no different to the immediate introduction of fresh capital into the partnership to achieve the same ends. The only difference is that the arrangements extend over a period.
This would also cover the position whereby B and C entered into arrangements to increase personally guaranteed loan facilities to the partnership to enable the payment to be made to A. (In other words, B and C would give/have given personal guarantees to secure a loan to the partnership and in the event that these guarantees were called upon, the funds would be non-partnership funds). This is because the guarantees, in the event of them being called in, would have the effect of increasing the partnership capital (by reducing the partnership debt from sources other than the partnership).
Again, if B and C gave A £100,000 each from assets they held outside the partnership, this would also constitute arrangements for a transfer as A would only have withdrawn £300,000 from the partnership capital leaving £1,200,000 to be split between B and C. Thus they would have entered into arrangements to facilitate the transfer of the £100,000 of partnership capital to each of them and the transaction would be chargeable (again on 16.7% of the market value of the partnership property each).
4) A two person equal partnership (A-B) has profits of £100,000 and partnership capital of £1,000,000. A new partner (C) is introduced, receiving an equal share and contributing £500,000 as partnership capital. The resultant position is that it is now a three person equal partnership (A-B-C) with partnership capital of £1,500,000.
This is not a transfer under Paragraph 36(a) as the original partners (A and B) still have the monetary equivalent of £500,000 of net assets (one half of £1,000,000 is equivalent to one third of £1,500,000) and with the reasonable prospect of profits increasing in line with net assets the monetary equivalent of £50,000 of profits (one half of £100,000 being equivalent to one third of prospective profits of £150,000).
Although this is a transfer under Paragraph 36(b), as there were arrangements for each of the original partner’s (A and B) relative interest in the profits and assets to decrease (from one half to one third), there has been no withdrawal of money or money’s worth by either of them and so it is not a chargeable transfer.
5) A three person equal partnership (A-B-C) has profits of £150,000 and partnership capital of £1,500,000. One of the partners (A) increases their share of profits and assets to two thirds by contributing an additional £500,000 as further partnership capital. The resultant position is that it is still a three person partnership with two partners (B and C) having a one quarter interest and the other (A) a one half interest with partnership capital of £2,000,000.
This would not normally be a transfer under Paragraph 36(a) as partners B and C with the one quarter interest each still have the monetary equivalent of £500,000 of partnership capital and with the reasonable prospect of profits increasing in line with net assets the monetary equivalent of £50,000 of profits.
This is not a transfer under Paragraph 36(b) as no one has become a partner.
It would be a transfer under Paragraph 36(a) if there were arrangements such that (say) B reduced their interest below one quarter (or left the partnership) at a later time, where this withdrawal was enabled by the introduction of the additional capital by A, as the cash equivalent of their share would have reduced below what it was before the transaction. In other words, if there are arrangements, the fact that the increase in available cash occurs before the reduction of interest by another partner does not take the composite transaction out of charge (by virtue of Paragraph 14(4)(a)).
For example, where the partnership only had available cash of £300,000 and, to facilitate B’s withdrawal from the partnership A had contributed the additional £500,000, this subsequent withdrawal of B’s partnership capital and reduction of partnership interest by B would be the effective date of the transaction.
6) A two person equal partnership (A-B) has profits of £100,000 and partnership capital of £1,000,000. A wishes to retire and the partnership wishes to introduce another partner, C. C contributes partnership capital of £500,000 to the partnership and becomes an equal partner with B. Simultaneously, A retires and withdraws £500,000 capital from the partnership.
This would not, normally, be a transaction under either Paragraph 36(a) or Paragraph 36(b). It can be seen as two separate events, the introduction of a new partner (C) and the retirement of a partner (A). In this case, the introduction of the new partner would be treated as in example (4) above and the retirement of the old partner as in example (3) above.
From this, it can be seen that, unless there are arrangements whereby the funding of the retirement of partner A is dependent on the introduction of partner C, there is no transaction under Paragraph 36. Arrangements would extend to the positions where the withdrawal of money or money’s worth by A could only proceed with the introduction of money or money’s worth by partner C, the guaranteeing of a loan by the partners to enable repayment to A or some other arrangements, whereby funding which was not then available to allow A to withdraw his capital was put in place, including funding of the withdrawal over a period.
7) A two person equal partnership (A-B) has profits of £100,000 and partnership capital of £1,000,000. Another partner (C) is admitted for no contribution as he is a potential high profit earner. In return he receives a 2% interest in the capital of the partnership and a one third interest in the profits, the other two partners reducing their share to one third interest in the profits each and 49% each of the capital.
This would be a transfer under Paragraph 36(a), but would not normally be chargeable under Paragraph 14(1) as although both of the original partners have reduced their interest in the net capital of the partnership, the incoming partner has not given money or money’s worth for the transfer.
This would be a transfer under Paragraph 36(b), but would not normally be chargeable under Paragraph 14(1) as although C has become a partner and both A and B have reduced their respective interests in the partnership, neither A nor B have withdrawn money or money’s worth from the partnership.
If there were arrangements in place such that C preferentially left (part of) his profits in the partnership (turning them into partnership capital), C would have given money or money’s worth for the transfer and the transaction would be chargeable (as the partnership capital of A and B would be increased because of C’s leaving (part of) his profits in the partnership).
Under the Limited Partnerships Act 1907, a Limited Partnership must have at least one general partner who manages the business of the partnership and is fully liable for the partnership debts and one or more limited partners who cannot take part in the management of the partnership and are liable only up to the extent of their capital contribution to the partnership.
To restrict the liability of the limited partners, it is usual to have a very low capital contribution and provide working capital to the partnership by way of loans from the partners. In the following example, it is assumed that there is a general partner who has a negligible entitlement to the assets of the partnership. The named partners are all limited partners.
Because of the special status of Limited Partnerships, limited partners are forbidden to withdraw their capital contribution from the partnership during the lifetime of the Limited Partnership.
8) A three person equal Limited Partnership (A-B-C with general partner D) has initial partnership capital of £4. Each of the limited partners has also made a loan to the partnership of £499,999 and the partnership itself has borrowing of £1,500,000. It owns a property worth £3,600,000 (bought for £3,000,000 with the £1,499,997 partner loans, £1,500,000 partnership borrowing and £3 initial capital) and the partners have accumulated cash in the partnership (from undrawn profits) amounting to £300,000 between them. Partner A wishes to withdraw from the partnership.
It would be usual for A to assign his rights to the remaining partners (as he is not allowed to withdraw his initial £1 contribution until the partnership dissolves) and, to do this, requires the agreement of the general partner. The net position is that A would expect to receive £799,999 from the partnership (being £499,999 loan repayment, £200,000 net property gain and £100,000 undrawn profits).
If the property were sold and A repaid, the assignment of rights to the remaining partners with the consent of the general partner would amount to arrangements and there would be a transfer under Paragraph 36(a). However, B and C have not given money or money’s worth for the transaction and so it is not a chargeable transaction. There would not be a transaction under Paragraph 36(b) as no-one had become a partner.
If B and C each introduced additional partnership capital of £250,000, and A was repaid from this, the assignment of rights to the remaining partners with the consent of the general partner would amount to arrangements and there would be a transfer under Paragraph 36(a). As partners B and C had acquired an increased entitlement to capital (up by £250,000 each), and would have given money or money’s worth for it, the transaction would be chargeable. Again, there would not be a transaction under Paragraph 36(b).
Depending on the facts of the case, there could be arrangements whereby the partners retained sufficient undistributed profit in the partnership (thereby turning it into accumulated capital) such that partner A could withdraw his full entitlement to capital and repayment of loan. Again, the assignment of rights to the remaining partners would constitute arrangements and there would be a transaction under Paragraph 36(a). Where the facts indicated that the retention of profit in the partnership was in fact payment for the assignment by A, this retention of profit in the partnership to facilitate withdrawal by A is the giving of money or money’s worth by B and C, so making the transfer a chargeable transfer. Again, there is not a transaction under Paragraph 36(b) as no-one has become a partner.
For A to assign his share in the partnership to anyone who is not a partner, he must obtain the consent of the general partner and that other person must contribute capital to the partnership. The obtaining of consent amounts to arrangements and the payment of capital to the partnership is the giving of money or money’s worth and thus any such transaction is a chargeable transaction under paragraph 36(a).
Companies in partnership
Where the partners in a partnership are all bodies corporate and a transaction to which FA03/SCH15/PARA10 (transfer of a chargeable interest into a partnership) occurs of to which FA03/SCH15/PARA18 (transfer of a chargeable interest out of a partnership) occurs, there is an additional rule to take account of.
Where, having determined the Sum of the Lower Proportions (SLP) this figure is 75% or more, there is no reduction in the market value charge for SLP. Thus the full market value of the chargeable interest transferred is chargeable.
Anti-avoidance
It is possible to transfer a chargeable interest in land into a partnership and reduce the chargeable consideration by arranging for the partnership share which is initially transferred to be small so that the consideration (based on market value) is also small. Further to the arrangements, a subsequent transfer of partnership share occurs, with no payment, to give effect to the desired partnership ownership.
As an example, consider an equal two person partnership, where the partnership wishes to own a property currently owned by one of the partners. Arrangements could be entered into whereby the non property owning partner transfers all but 1% of his share to the property owning partner, for no consideration. The property owning partner now transfers the property into the partnership. Because this partner now owns almost all the partnership share on which the charge is calculated, the charge is reduced. Subsequently, this partner returns the ‘borrowed’ share back to its original owner.
FA03/SCH15/PARA17 charges the transfer of the interest in the partnership to Stamp Duty Land Tax, irrespective of there not being any consideration in money or money’s worth for the transfer. It also makes this transfer a linked transaction with the original transfer of the chargeable interest into the partnership
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