With so many portfolio landlords getting caught my the s24 interest restriction it was no wonder that incorporating the portfolio was the solution. The problem was that whilst most portfolio landlords could satisy the “business” case and claim relief for CGT under s162 based, the SDLT charge was often large and unpalletable.
Along came many notorious websites ( Pure fiction 118 and More Tax For Landlords..?) telling all and sundry that you could create a Partnership and then incorporate it to save SDLT? Or that you can transfer the beneficial interest in your properties to a Limited Company and this will avoid SDLT? Here are the reasons why you shouldn’t go down these routes. Despite how attractive they seem in respect of the potential SDLT you could save..don’t do it.
Section 75A FA 2003
What is it and why should I care? Section 75A was actually implemented by HMRC in 2006 to stop abusive SDLT schemes involving transactions where steps were inserted in order to give rise to an SDLT advantage. For example, the artificial steps may have given rise to a relief or combination of reliefs that would not otherwise be available to a taxpayer. Partnerships, in particular, have been used for SDLT avoidance purposes. However, following a recent case, HMRC v Project Blue Limited which went to the Supreme Court and found in HMRC’s favour, HMRC updated their guidance in their SDLT manual in January 2020 and their updated guidance has far-reaching consequences for landlords. See the full judgement here.
What this means in practice is that if you attempt to take any artificial steps to save SDLT, whether it be to set up a Partnership to incorporate either immediately/within a few years or whether it is to avoid SDLT altogether by schemes such as transferring the beneficial interest in the properties to a Limited Company, HMRC are likely to challenge this and invoke Section 75A FA 2003. If HMRC are successful this will result in SDLT being payable in full and potential penalties and interest being payable to HMRC.
We consider there to be a high risk of HMRC taking the view that Section 75A FA 2003 would apply where there is a transfer into a partnership and out of the partnership, where this would otherwise result in no charge to SDLT under the special partnership rules unless there is a bonafide established partnership which has been operating for many years. The SDLT would be payable on the market value of the properties when being transferred out of the Partnership and into the new Limited Company which will presumably be higher than the market value of the properties when they were introduced to the Partnership. The provision applies regardless of a tax avoidance motive and our recent experience is that HMRC is applying the provision widely so landlords need to be wary of taking any steps which could ultimately result in paying more SDLT to HMRC than if the properties were transferred directly to a Limited Company without the ‘stepping stone’ of a partnership.
Want to save SDLT?
There may be legitimate ways we can help you save SDLT but unlike some of these websites promoting methods of saving or avoiding SDLT altogether, we will only provide you with advice that you can rely on and not have to worry about HMRC coming knocking for any unpaid SDLT in the future.
It is now more important than ever that you get advice from a firm you can trust in order to avoid having to worry about the uncertainty around your transaction. Put your mind at ease and speak to a specialist property tax adviser before you undertake any steps which could result in a larger than expected SDLT liability.
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