SDLT – Current Problem Areas in Commercial

property

London10 March 2005

Patrick Cannon, 24 Old Buildingspatrick@patrickcannon.net

Special Situations

• Partnerships and land• Unit trusts – unwinding issues• Lease anti-avoidance• Disclosure – Langham v Veltema in

SDLT

Property Owning Partnerships The New Rules

• Transparency principle• Contrast with Stamp Duty• Contrast with Capital Gains Tax • SDLT chargeable on:

- The transfer of land into a partnership by a partner.- The acquisition of an interest in a partnership.- The transfer of land out of a partnership to a partner.

Contribution to a PartnershipBefore the transfer

Partnership

Prop 1

Value £1m

Prop 2

Value £1m

50% 50%

A B

Contribution to a PartnershipC joins the partnership. C transfers Property 3 worth £1m to the partnership as a partnership contribution and becomes entitled to 33.4% of the partnership profits

Partnership

SDLT is charged on £1M x 66.6%, being the total of the other partners' shares after the transfer

A B C

33.3% 33.3%33.4%

Prop 1

£1m

Prop 2

£1m

Prop 3

£1m

The Partnership Formula

(RCP x MV) = (RCP x AC)

Where:RCP = relevant chargeable proportionMV = market valueAC = actual consideration

The RCP

In the RCP x MV calculation, RCP = (100 – SLP)%

In the RCP x AC calculation, RCP = SLP %

SLP = ‘sum of the lower proportions’

= the aggregate of the partnership interest, after the transfer, of the transferor and any partner who is connected with the transferor.

Connected Parties and Actual Consideration

In a simple case involving no connected parties eg slide 5, SLP would be 33.4%, the partnership share acquired by C.

If B was C’s spouse, SLP is 66.7% so the SDLT charge is on 33.3% of market value.

If the property is worth £2m and C receives £1m from the partnership in addition to the partnership share (and still assume that B is C’s spouse) the computation is

(33.3% x £2m) + (66.7% x £1m)

= £666,000 + £667,000 = £1,333,000 x 4% = £53,320

Transfer of Partnership InterestWhere a partnership owns an interest in UK

land and:• An existing partner transfers all or part of their partnership interest to a new or existing partner for money or money's worth, or

• A person becomes a partner and an existing partner reduces their partnership share (or retires from the partnership) and withdraws money or money's worth from the partnership.

Transfer of partnership interest

Before the transfer

Partnership

A B

50% 50%

Prop 1

Value £2m

Prop2

Value £1m

Non-property

asset value £1m

Transfer of partnership interest

C buys B's 50% share in the partnership for £2m

Partnership

SDLT is charged on £1.5m, being 50% x £3m. £3m is the market value of the real property. The charge would be on the £1.5m market value of C's acquired share in the properties even if C did not pay market value to B, provided some consideration is given in money or money's worth.

A B C

50% 50%

£2m

Prop 1

Value £2m

Prop 2

Value £1m

Non-property

asset value

£1m

Sale

Transfer of land out of a partnershipBefore the transfer

Partnership

A B C

33.3% 33.3% 33.4%

Prop 1

Value

£5m

Prop 2

Value

£3m

Prop 3

Value

£2m

Transfer of land out of a partnershipC retires and Property 3 is transferred to him. Property 3 is worth

£2m, 20% of the value of the partnership real property.

Partnership

SDLT on RCP which is 100 – 33.4% = 66.7% of M.V.

Note: 33.4% deducted only if Property 3 was acquired pre 20 October 2003 or stamp duty or SDLT was paid on partnership's acquisition of Property 3.

A B C

33.316.7+50.0%

33.316.7+50.0%

33.433.4- 0%_ Transfer of Property 3

Prop 1 Prop 2

What ‘Transfers’ are Taxed?

• No consideration = No SDLT• Partnership debt as consideration?• Where there is an actual transfer of an

interest in a partnership – actual consideration

• Where there is an incoming and a retiring or reducing partner – withdrawal of money

• Avoid withdrawal – dilution/high debt solution• No ‘arrangement’ - retirement/withdrawal ok

The Para 14 ‘Problem’

• ‘Purchaser’ is the person acquiring an increased partnership share

• Partnership share = income sharing proportion

• So is a mere change in profit shares a taxable ‘transfer’?

• Transfer of ‘an interest in a partnership’ is required

• Revenue’s view of ‘consideration’

Partnership v Unit Trust

• Unit trust - a company (except for ‘connected company’ mv

charge); units are ‘shares’ - no ‘look through’ - exemption for ‘seeding’• Partnership - not a unit trust - ‘look through’ - no ‘seeding’ exemption• Contribution of partnership to unit trust?

Unit Trust Unwinding

Vendor Purchaser

Property

Units

Sale of units

Unit TrusteesJersey Distribution of

Property

Unit Trust Unwinding

• Is there a market value charge where unit holder is a company?

• S 53 FA 2003• S 101(7) FA 2003: not a ‘company’• S 839 ICTA 1988 : ut is a ‘company’• If ut is a ‘company’ then it is

connected but s 54 FA 2003 case 3 exemption for company distributions applies

Unit Trust Unwinding

• Capital Allowances• Not s 198(2) CAA 2001• ‘Connected’ for s 839 ICTA• S 266/267 CAA 2001 – deemed sale

on succession for no balancing allowance/balancing charge

• Watch earlier s 198(2) election on original contribution

Leases: FA 2004 Changes

• Any variation other than to a lease = acquisition of a chargeable interest

• Variation of a lease = acquisition only where:

(a) Variation takes effect as grant of new lease; (b) Variation reduces rent – acquisition by

lessee; or(c) Variation reduces term – acquisition by

lessor. • Variations involving break clauses etc ? Para

2(b) Sch 17A FA 2003

Leases to Nominees

• Grant of lease to nominee – disregarded for SDLT

• First non-exempt assignment = deemed grant of a lease by assignor on same terms as assignee holds lease

• Aimed at taxing rent – what about premium?

• Effect of deeming provisions in tax?• Marshall v Kerr, R v Dimsey

Disclosure in SDLT

• Langham v Veltema [2004] EWCA Civ 193

• Inland Revenue Guidance 23/12/04• SDLT implications ?