This article appeared in the Yorkshire Post on Saturday 15th November 2005.

Partnerships and Land

Duncan Meredith G&E Tax Consultant

Duncan Meredith examines Stamp duty land tax (SDLT) implications when a partnership has a land transaction. Duncan is a Senior Tax Consultant in Garbutt & Elliott’s Property Services Team.

SDLT is now a major tax with rates having quadrupled in recent years and recent extensions to affect almost every sort of land transaction. Since 2004, partnerships that have an interest in land may find themselves unwittingly paying SDLT on an innocent-looking transaction.

There are several forms of partnership, which could be set up under the Partnership Act 1890, the Limited Partnership Act 1907, the Limited Liability Partnership Act 2000 or the Limited Liability Partnership Act ( Northern Ireland) 2002. A number of overseas entities would be included in the definition of partnership.

For tax purposes including SDLT a partnership is transparent. Therefore, interests in land are treated as held by or on behalf of the individual partners.

SDLT was introduced by the Finance Act 2003 but originally only applied to actual land transactions by partnerships. From 23 July 2004, all other partnership land transactions have been brought within SDLT, including changes in partnership shares where the partnership assets include land. These new rules are very complex and appear to have been introduced by hurried legislation. Some errors have already been corrected by the Finance (No 2) Act 2005. Additionally, there exists a draft version of a new Inland Revenue Manual, which was issued for consultation in March 2005.

The SDLT rules affect freeholds, leases and other land transactions. A charge may now arise on the following:

1. The transfer of an interest in land to a partnership.

2. Changes in the proportions by which partners own interests in partnership land.

3. The transfer of an interest in land from a partnership.

Special rules apply for connected persons. The Revenue also construe the definition of partnership property to include land outside the partnership that is used for the partnership business.

In the case of 2 above, the proportions are measured by the partners’ entitlement to income profits and not, as might be expected, capital profits. This can lead to some surprising results.

One example of the uncertainty in the new rules is where a partner is entitled to a fixed salary and also a profit share. This will have the effect every year of altering the overall percentage share of the total partnership income profits. However, this may mean that there is a change in the proportion in which the partners own interests in partnership land (as this is measured according to the manner in which income profits are shared). The question of the timing of any related SDLT return also presents difficulties.

Note that there is no SDLT charge on the formation of a new partnership, unless there is a transfer of an interest in land, which arises because of a change in the partnership shares. Particular care has to be taken because of the fact that the measurement is based on income sharing and not capital sharing.

In the case of a transfer of land to a partnership, the tax is based partly on the market value of the land and partly on the amount of consideration actually paid by the other partners. The rate charged may be higher than expected, if the various transactions are treated as “linked” transactions.

A transfer of land to a partnership and a withdrawal of capital within three years can also be caught. This is to prevent avoidance by making an initial gift of the land and then paying the money out later. However, it catches all cases, even if there is no connection between the two events.

Situations where a transfer of partnership interest is caught involve where consideration is given for the transfer and the partnership property includes land. Consideration includes the withdrawal of partnership capital by a retiring partner. A market value rule is applied.

There is a practical problem in that there is a need to determine whether and how much SDLT is due and complete the SDLT return, submitting it and paying the tax due within 30 days of the transaction. If income shares are not known within that time, presumably estimates have to be made and corrected later.

Overall, the message is that there could be hidden SDLT charges in partnership land transactions. It is necessary to seek advice early to avoid these unwelcome tax liabilities.

Garbutt & Elliott are Chartered Accountants and Tax Advisers with offices in Leeds (telephone 0113 2739600) and York (01904 464100). Duncan Meredith can be contacted at the York office, or by email to dmeredith@garbutt-elliott.co.uk.