All About Stamp Duty on Transfer of a Property Partnership

Recent years have seen a steady flow of property partnerships being incorporated into limited companies. In the vast majority of cases, the incorporation will have been effected for genuine commercial reasons as well as for prudent long-term tax planning. Clearly, the change to interest relief for residential property lettings, known as Section 24, has increased the number of landlords looking at the incorporation of their property businesses. 

The obvious potential obstacles to the incorporation of a property partnership are Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). Whilst limited companies provide undoubted opportunities for effective tax planning and wealth protection, the one- off costs of CGT and SDLT on the transfer of a property business to a limited company can often be prohibitive. 

There would appear to have been a number of advisors who have reassured clients that these one-off costs can be avoided and in the case of SDLT, by virtue of Section 53 and Schedule 15 Finance Act 2003 which specifically refers to partnerships. 

The legislation contains a five-step process, which if the relevant criteria are met, results in no SDLT being payable on the transfer of the partnership property to a limited company. In a simple overview, the 0% charge will apply where the entire partnership property portfolio is transferred to the limited company in exchange for shares.

The main issue to consider before relying upon this legislation is whether a partnership actually exists for the purposes of the SDLT legislation. There has been a recent case heard before the First Tier Tax Tribunal, SC Properties Limited, and Richard Cooke [2022] UKFTT 00214 (TC), which considered whether a partnership actually existed. There is particular relevance in the case as it involved the incorporation of a property partnership.

In the case, the Tribunal judge sets out three conditions that must be present for a partnership to exist:

• There must be a business.

• The business must be carried on by two or more persons in common.

• The business must be carried on with a view to profit.

The Judge’s thoughts on the existence of a partnership include some useful pointers which worked against the taxpayer:

• Loans were made in individual names rather than the partnership.
• Inconsistent information was provided to HMRC about the date when the partnership commenced.
• No relevant documents made reference to a partnership.
• Tax returns and partnership accounts were not held to be independent evidence of the existence of a partnership.
• The partnership did not have its own bank account and was not registered for VAT.

Whilst the above list is not exhaustive it does give an indication of some of the evidence sought by HMRC in determining whether a partnership exists. In addition to the above factors a signed partnership agreement is helpful.

Arrangements that involve retrospectively producing paperwork and effectively reinventing past events are always going to be vulnerable to HMRC scrutiny.

Property that is registered in sole names rather than partnership names will also weaken the defense in an HMRC inquiry.

As always, a sound paper trail is paramount in supporting the existence of a partnership.

Given the increased interest in incorporations of property partnerships, HMRC will be keen to identify cases where the formation of a partnership is undertaken to satisfy the criteria for the special SDLT calculation. In these cases, HMRC may be able to utilize Anti Avoidance legislation under Section 75A Finance Act 2003. Section 75A was primarily introduced to counteract SDLT avoidance schemes. The legislation applies where there is a disposal of a chargeable interest using a number of transactions. If Section 75A is held to be relevant, then any intermediate steps are disregarded. There have been two cases that have considered the application of Section 75A:

Project Blue v HMRC [2018] UKSC 30- 

Project Blue – UKSC-2016-0137-judgment.pdf

Hannover Leasing V HMRC [2019] UKFTT 0262 (TC)- 

TC07102…pdf (tribunals.gov.uk)

These cases established that Section 75A can apply to indirect acquisitions of property where there is a commercial purpose and most significantly even when there is no evidence of a motive to avoid SDLT. The situation is further compounded as HMRC will not provide any Clearance as to whether Sec 75A applies to transactions.

Given the uncertainty regarding the application of Section 75A in relation to property partnership incorporations and specifically whether the special calculation applies, there must be a good deal of caution exercised as to whether a 0% SDLT rate will apply to the transfer of property. A full and detailed review of the partnership’s history and set-up needs to be undertaken before any reasonable assumption of the SDLT position can be made.

It cannot be stressed strongly enough that any attempt to present a property partnership to HMRC, that has been “tinkered with or contrived” to avoid SDLT, is very likely to end badly for the client and the advisor.  There will be a very limited number of cases that meet the necessary criteria, and such cases will need to have been set up properly from the outset, normally from when any property was first acquired.

Whilst understandable, changes such as interest relief should not be the catalyst for landlords to be driven into an incorporation marketed as straightforward when the reality may well be quite different.

If you have any questions about this topic please contact UK Landlord Tax on 01902 711370 or email enquiries@uklandlordtax.co.uk

We hope you found this article informative, if you found this article useful then you may also enjoy our guide to rental income tax or sharia mortgages next.

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG