The SDLT legislation applicable to partnerships (which includes partnerships under the Partnership Act 1890 and Limited Liability Partnerships under the 2000 Act) is, in my opinion, the most complex area of the entire SDLT regime.
The effect of these rules can be overlooked by those laying plans for succession in partnerships, particularly family farming partnerships, and it often proves the rule that “tax should come first”. As a result, I’ve set out below some useful points to consider when dealing with land and partnerships.
SDLT and farming partnerships
Farming partnerships often find themselves having to consider SDLT, as they are frequently property-heavy and family oriented, with a “trading” status where partners are admitted without payment and land moves around as succession plans change. Difficulties can arise where not all of the parties are “connected”. For instance, it surprises some that an uncle and his nephew are not “connected” for the purposes of SDLT, which can result in a charge to tax.
Does the transaction involve a partnership?
The first question, often overlooked, is whether there is, in fact, a “partnership” (particularly in the case of property investment partnerships), as the rules for co-ownership of property and property owned and used “between persons carrying on business in common with a view to profit” are quite different.
It is always worth considering what the reality of the relationship is first, before delving into the legislation.
Which partnership transactions to look for
Changes in Finance Act 2003 and 2004 brought a range of provisions concerning common partnership transactions, including:
- Transfers of land into partnership by a partner or someone who becomes a partner, or someone connected with either
Here, we might be looking at the introduction of new land into an existing partnership or the creation of a new business.
- Transfers of partnership interests
Following more recent amendments, this is now limited to transfers of interests in property investment partnerships and transfers in accordance with pre-existing arrangements. It is important therefore to be certain of the type of partnership you have – does the partnership trade or is it simply collecting rent?
- Transfers of land from a partnership to an outgoing partner or to someone who has been a partner, or to a person connected with either
This might crop up on dissolution or retirement. You should also be sure of how the regime interacts with other reliefs (such as partition relief).
How is SDLT charged?
In the scenarios above, where tax is due, it is generally based on the market value (or a proportion of it) of the property transferred, rather than the consideration (i.e. money or “money’s worth” – if there is any) given for it. It is also important to remember that SDLT is concerned with how the income in the partnership is divided, not capital. The rules can therefore produce a varied results depending on ownership.
Of course, where a partnership purchases land from an unconnected seller, as you would expect, there is the ordinary charge to tax payable by the partners of the partnership based on the consideration paid. The same applies when the partners sell to an unconnected buyer, with the buyer liable for the SDLT.
Conclusions
You need to be sure that the advice you’re getting is correct. Seemingly simple transactions, such as the dissolution of the family farming partnership, can result in a charge to tax if not structured in the right way.
Failure to get the right advice might mean you pay when you don’t need to. Alternatively, you might be left having to pay penalties and interest on top of the tax due to a failure to pay the correct amount.