.png)
.png)
Stamp Duty Land Tax
Stamping Down
David Whiscombe wonders whether the changes to stamp duty land tax for partnerships do what it says on the tin.
Stamp Duty Land Tax
Stamping Down
David Whiscombe wonders whether the changes to stamp duty land tax for partnerships do what it says on the tin.
Finance Act 2003 excluded partnership transactions from the scope of stamp duty land tax (SDLT): the suspicion has been that SDLT was introduced in such a rush that there simply was not time to think through some of the trickier bits. FA 2004 therefore introduces the changes required to apply SDLT to partnerships. Does the delay mean that everything was carefully thought through? Let the reader judge.
Retained interest
At the time of the Budget, BN15 explained inter alia that:
'Where an interest in land is transferred into a partnership, either by an existing partner or by a person in exchange for an interest in that partnership, SDLT will be chargeable at the appropriate rate on a proportion of the market value of that land interest. The proportion will be equal to the proportion of the land interest transferred to the other partners as measured by their partnership … The changes will charge only the proportion of the property being transferred into a partnership. This recognises concerns raised, that charging the whole value of the land meant that the part of the land retained (through their partnership share) by the person transferring it, was being brought into the charge to tax unfairly.'
That is clear enough. To the extent that I retain an interest in the land via my interest in the partnership, I haven't really transferred anything, so that proportion must be excluded from charge. But hang on — what's this about market value? Isn't SDLT normally charged by reference to the consideration passing? Normally no SDLT is payable on a gift of land. Why should it be that if I gift land to a firm in which I am a partner, SDLT is chargeable? One looks in vain for any explanation of this basic point.
Higher mathematics
Let us move on. Sch 39 to the Finance Bill rewrote FA 2003, Sch 15 Part 3 in a way that more or less reflected BN15. But by the time it came to be enacted as FA 2004 Sch 41, changes had been made. Instead of a simple charge on the proportion of the value changing hands, we now have a much more complicated formula. SDLT is now chargeable on:
(RCP x MV) + (RCP x AC)
where MV means the market value of the land transferred, AC means the actual chargeable consideration and RCP means, incredibly, one thing when it appears in the first bracket and something utterly different when it appears in the second bracket! I wager the draftsman does not have a background in higher (or indeed lower) mathematics. The first RCP means broadly 'the proportion that the transferor is giving up to his partners' and the second RCP means broadly 'the proportion the transferor is retaining via the partnership'.
The Financial Secretary to the Treasury endeavoured to explain this in the course of debate (Hansard, 6 July cols 744 to 746). The explanation runs as follows:
'Our intention is to deal with those situations in which joint owners outside a partnership transfer land into a partnership in which they, or persons connected with them, are partners. An example is when a husband and wife start up a business in partnership, and the business is run from their jointly owned property. The calculation now identifies the smallest proportion of the land transferred that remains owned by a person who both owns the land outside the partnership and is a partner. For example, when parents gift land to a partnership in which the partners are their children, there would be no charge as the children would be connected to their parents. Their ownership outside the partnership would therefore be treated as 100 per cent. There might be occasions on which land is transferred by way of sale rather than by gift. In such cases, any payment will be charged. The charge on the payment is restricted to reflect the proportion of the land that is exempt from the market value charge'.
Real world transfers
How does this explanation and the formula work in the real world? Assume that I am a 10% partner in a partnership. I sell to the partnership for £600,000 a building that has a market value of £800,000. One would expect that SDLT might be due on £600,000 x 90%. Wrong. Tax is due on:
£800,000 x 90% + £600,000 x 10% = £780,000
In most cases, a partner is unlikely to be giving land to a partnership. It is much more likely that he will be introducing it for full consideration. What happens in that case? It is here that the differences between what the legislation seems to say and what we thought it was intended to say start to appear.
Imagine that I am a sole practitioner. I own the business premises. I take a junior partner into partnership with a 10% share and I introduce the business premises into the partnership, crediting my capital account with the market value of £800,000. You might imagine that since I have effectively transferred 10% of the property to my new partner, SDLT might be due on 10% of £800,000. Wrong again, in my view. The formula appears to produce the following amount chargeable to SDLT:
£800,000 x 10% + £800,000 x 90% = £800,000.
Can introducing a 10% partner to my business create an SDLT charge on 100% of the partnership real estate? I rather doubt if this is what Members of Parliament thought they were voting for, in the unlikely event that they thought about it at all. The only way in which it seems possible to get the legislation to say what it was possibly intended to mean is to argue that crediting the value of land to a partner's capital account on its introduction as a partnership asset does not amount to 'actual consideration' so that that term encompasses only off-balance sheet payments. It is difficult, however, to wring this meaning from the words of the Act. And it would be difficult to distinguish 'actual consideration' due from a partnership but left outstanding on loan account from the crediting of value to a partner's capital account. But if this is how the Act is to be interpreted, it would helpful for the Revenue to say so.
Retirement
What happens when I retire from the partnership and draw down my capital account? New para 14 of Sch 15 applies. This imposes an SDLT charge if there is a transfer for consideration of an interest in a land-owning partnership (to paraphrase the Act). The definition at para 36(a) of transfer of an interest — 'a partner transfers the whole or part of his interest as partner to another person (who may be an existing partner)' — seems apposite to include a retirement. Consideration is regarded as given for the transfer if money or money's worth is given by or on behalf of the person acquiring the interest. This would not appear to include my drawing down of my capital account. This seems right: otherwise, a charge to SDLT would be imposed under para 14 on the relevant proportion (90% in our case) of the market value of the land on my retirement. Since SDLT has already been paid on the whole of the value of the land when it was put into the partnership, it cannot be intended that SDLT will be charged again when I leave the partnership.
What if the value of the land has gone up between the time it went into the partnership and the time I leave? Apparently, this makes no difference. Even if the land has been revalued and 90% of the increase credited to my capital account, it would nonetheless appear that merely drawing down capital is not 'consideration given for the transfer'. Again, the legislation would make more sense if one could argue that while crediting to a capital account is not 'giving consideration', actually paying out the capital account is. But this is hardly a natural meaning of the words of the Act.
Alternative definition
It gets worse. There is an alternative definition of 'transfer of an interest in a partnership' at para 36(b). This is where 'a person becomes a partner and an existing partner reduces his interest in the partnership or ceases to be a partner'. Although the definition at para 36(b) seems capable of overlapping that at para 36(a), the definition of 'consideration' for a para 36(b) case is subtly different — it extends to a 'withdrawal of money or money's worth from the partnership by the person reducing his interest or ceasing to be a partner'. So, if at the time I retire a new partner joins, it appears that my withdrawal of capital certainly does count as 'consideration' and SDLT does become chargeable on the share of the market value I am giving up. One has to wonder:
(a) why SDLT should in this case be chargeable, when SDLT has already been paid on the introduction of the land; and
(b) why drawing down capital is 'consideration' if a new partner joins, but not otherwise?
Conclusion
The conclusion that one draws from all of this must be that, despite having had an extra year to think about it — and despite materially changing the legislation in the course of the passage of the Finance Bill — the Revenue has still not got this quite right. Or, if it is right, then it is certainly not clear.
Meanwhile, until it becomes clear how the Revenue will in practice interpret the new Sch 15 Part 3, best advice would seem to be to avoid holding land within a partnership at all.
David Whiscombe is a director of Berg Kaprow Lewis, Tax Consultants.
--------------------
Visit www.brewermorris.com for the best tax opportunities in practice, industry and commerce - alternatively call Matthew Phelps on 020 7415 2815 to discuss your career situation.
