The stamp duty land tax time bomb
Justin Cumberlege of law firm Cripps looks at the stamp duty land tax regulations to help practice managers avoid any unpleasant surprises.
The transfer of property is subject to the payment of Stamp Duty
Land Tax (SDLT). The amount payable depends on how much is
being paid for the property (or a share in the property).
Current SDLT rates on the purchase of a freehold are zero for the first £150,000, 2% of the purchase price (or in some cases the market value) from £150,000 to £250,000 and then 5% on everything above that.
Where a partnership owns the freehold, when a partner retires and the continuing partners buy their share out, the acquiring partners would, under the usual SDLT rules, have to pay SDLT on the amount paid for the share. Fortunately, in Schedule 15 of the Finance Act 2003 there is an exemption where the transfer is a withdrawal of partnership capital (as opposed to being a payment for partnership property, but that is part of the capital) by the outgoing partner of an ongoing business. The rules for the exemption are complex and it is not difficult to fall foul of them. For example, if the paying out of the retiring partner is achieved by the admission of a new partner, the exemption may not then apply.
A problem arises where a partner retires and either there is no money to buy them out or no one thinks to do anything about it. At
this point, the property is no longer an asset of the partnership as a business, but it becomes an investment property. Leaving aside the risk of the partnership no longer being eligible for rent and rates reimbursement, it also means that on the transfer of the property SDLT is payable. In fact, there is an argument that it is payable on the retirement, as the beneficial interest in the property has changed.
HMRC have been understanding until now about the delays and, provided they are satisfied the transfer is as a result of a retirement of a partner from an ongoing business, and there was no intention for the partner to retain an investment interest in the property, it is treated as being exempt from SDLT. That intention can be reinforced in the partnership deed and in the trust deed for the property.
There will be a time when a retired partner has held on to the property for so long that it could then be treated as an investment property, particularly if they have continued to receive a share of the rent reimbursement. The deemed transfer from the business partners to property investment partners would result in SDLT being payable on the whole value of the property. The point to check is that the property is owned by partners who are active partners in the business, and when a partner retires, you should ensure their partnership capital (which includes their equity share in the property) is paid out at the time of retirement, otherwise you may be in for a nasty surprise in the future.
This article first appeared in Practice Management in October 2018.