SDLT – Current Problem Areas in Commercial property London 10 March 2005

SDLT – Current Problem Areas in Commercial propertyLondon10 March 2005 Patrick Cannon, 24 Old Buildings patrick@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 Partnership Before the transfer A B 50% 50% Partnership Prop 1 Value £1m Prop 2 Value £1m

Contribution to a Partnership C 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 A B C 33.3% 33.3% 33.4% Partnership Prop 1 £1m Prop 2 £1m Prop 3 £1m SDLT is charged on £1M x 66.6%, being the total of the other partners' shares after the transfer

The Partnership Formula (RCP x MV) = (RCP x AC) Where: RCP = relevant chargeable proportion MV = market value AC = 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 Interest Where 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 A B 50% 50% Partnership Prop 1 Value £2m Prop2 Value £1m Non-property asset value £1m

Sale Transfer of partnership interest C buys B's 50% share in the partnership for £2m A B C £2m 50% 50% Partnership Prop 1 Value £2m Prop 2 Value £1m Non-property asset value £1m 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.

Transfer of land out of a partnership Before the transfer A B C 33.3% 33.3% 33.4% Partnership Prop 1 Value £5m Prop 2 Value £3m Prop 3 Value £2m

C A B Transfer of land out of a partnership C retires and Property 3 is transferred to him. Property 3 is worth £2m, 20% of the value of the partnership real property. 33.3 16.7+ 50.0% 33.3 16.7+ 50.0% 33.4 33.4- 0%_ Transfer of Property 3 Partnership Prop 1 Prop 2 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.

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 Sale of units Units Unit Trustees Jersey Distribution of Property 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 variationother 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; • Variation reduces rent – acquisition by lessee; or • 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 ?

SDLT – Current Problem Areas in Commercial property London 10 March 2005