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SDLT – Current Problem Areas in Commercial
property
London10 March 2005
Patrick Cannon, 24 Old [email protected]
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Special Situations
• Partnerships and land• Unit trusts – unwinding issues• Lease anti-avoidance• Disclosure – Langham v Veltema in
SDLT
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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.
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Contribution to a PartnershipBefore the transfer
Partnership
Prop 1
Value £1m
Prop 2
Value £1m
50% 50%
A B
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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
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The Partnership Formula
(RCP x MV) = (RCP x AC)
Where:RCP = relevant chargeable proportionMV = market valueAC = actual consideration
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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.
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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
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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.
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Transfer of partnership interest
Before the transfer
Partnership
A B
50% 50%
Prop 1
Value £2m
Prop2
Value £1m
Non-property
asset value £1m
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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
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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
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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
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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
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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’
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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?
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Unit Trust Unwinding
Vendor Purchaser
Property
Units
Sale of units
Unit TrusteesJersey Distribution of
Property
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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
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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
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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
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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
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Disclosure in SDLT
• Langham v Veltema [2004] EWCA Civ 193
• Inland Revenue Guidance 23/12/04• SDLT implications ?