LBTT7003 Transfer out of a partnership

LBTT7003 Transfer out of a partnership

The transfer of a chargeable interest from a partnership under Part 5.

Certain rules apply when a chargeable interest is transferred from a partnership to:

  • a person who is or was a partner, or
  • a person connected with a person who is of has been one of the partners

Property that was partnership property before the partnership was dissolved or otherwise ceased to exist is treated as remaining partnership property until it is distributed.

A property-investment partnership may elect to disapply these rules. See LBTT7006 Property investment partnerships (PIP).

Where a transaction is both a transfer to and from a partnership see:

  • LBTT7004 Transfer between partnerships

 

Calculation of chargeable consideration

The rules are similar to the rules that apply on the transfer to a partnership. They allow a reduction in the chargeable consideration. The reduction is the sum of the lower proportions held in the chargeable interest before and after the transfer.

However, there are separate rules if the transfer consists wholly of corporate bodies.


The formula is:

MV x (100 – SLP)%

Where MV is the market value and SLP is the Sum of Lower Proportions.


Note, the formula is the same for both transfer to and from a partnership, it is the calculation to arrive at the SLP that differs.

If whole or part of the chargeable consideration for the land transfer is rent, this section does not apply. Instead, you would need to apply the rules as at LBTT7005 Transfer involving leases.

For further guidance see:

 

Calculating the sum of lower proportions (SLP)

The sum of the lower proportions in relation to the land transfer is determined as follows:

  1. Identify the relevant owner or owners.
  2. For each relevant owner, identify the corresponding partner or partners. If there is no relevant owner with a corresponding partner, the sum of the lower proportions is nil.
  3. For each relevant owner, find the proportion of the chargeable interest to which the owner is entitled immediately after the land transfer. Apportion that proportion between any one or more of the relevant owner's corresponding partners.
  4. Find the lower of the following proportions (“the lower proportion”) for each corresponding partner—
  5. the sum of the proportions (if any) of the chargeable interest apportioned to the partner (at Step 3) in respect of each relevant owner,
  6. the partnership share attributable to the partner.
  7. Add together the lower proportions for each corresponding partner. The result is the sum of the lower proportions.

 

Relevant owners

Step 1: Identify the relevant owner(s).

A person is a relevant owner if—

  1. immediately after the land transfer, the person is entitled to a proportion of the chargeable interest, and
  2. immediately before the land transfer, the person was a partner or connected with a partner.

Persons who are entitled to a chargeable interest as joint owners are to be taken to be entitled to the chargeable interest as common owners in equal shares.

 

Example: transfer from a partnership – relevant owners

A farming partnership of four partners with equal 25% shares own a 400-acre farm. 

One of the partners A wishes to leave the partnership.

The partnership transfers 100 acres of land out of the partnership to Partner A.

Partner A as an existing partner is a relevant owner.

 

Corresponding partners

Step 2: For each relevant owner, identify the corresponding partner or partners. If there is no relevant owner with a corresponding partner, the sum of the lower proportions is nil.

A person is a corresponding partner in relation to a relevant owner if, immediately before the land transfer—

(a)the person was a partner, and

(b)the person was the relevant owner or was an individual connected with the relevant owner.

For these purposes, a company is to be treated as an individual connected with the relevant owner in so far as it—

(a)holds property as trustee, and

(b)is connected with the relevant owner only because of section 1122(6) of the Corporation Tax Act 2010.

 

Section 1122(6) CTA10

A person, in the capacity as trustee of a settlement, is connected with—

(a)any individual who is a settlor in relation to the settlement,

(b)any person connected with such an individual,

(c)any close company whose participators include the trustees of the settlement,

(d)any non-UK resident company which, if it were UK resident, would be a close company whose participators include the trustees of the settlement,

(e)any body corporate controlled (within the meaning of section 1124) by a company within paragraph (c) or (d),

(f)if the settlement is the principal settlement in relation to one or more sub-fund settlements, a person in the capacity as trustee of such a sub-fund settlement, and

(g)if the settlement is a sub-fund settlement in relation to a principal settlement, a person in the capacity as trustee of any other sub-fund settlements in relation to the principal settlement.

 

Example: transfer from a partnership – corresponding partners

The exiting partner is also their own corresponding partner.

It is possible that a relevant owner does not have a corresponding partner.

 

Proportion of the chargeable interest

Step 3: For each relevant owner, find the proportion of the chargeable interest to which the owner is entitled immediately after the land transfer. Apportion that proportion between any one or more of the relevant owner's corresponding partners.

You must therefore determine the share proportions of the chargeable interest after the transfer for each relevant owner. 

Each relevant owner’s proportion is then apportioned to their corresponding partner or partners.

The apportionment is at the discretion of the taxpayer. 

 

Example: transfer from a partnership: proportion of the chargeable interest

Partner A is the relevant owner.

Their entitlement is 100% of the chargeable interest after the transfer.

The apportionment for Partner A is 100% as relevant owner, to Partner A as their only corresponding partner.

 

The lower proportion

Step 4:  Find the lower proportion for each corresponding partner.

For each corresponding partner find the lower proportion. 

This is the lower of either:

  • the sums of the relevant owner apportionments (step 3) 

    or

  • the partnership share attributable to the partner.

To determine the partnership share attributable to the partner, use the following steps:

  1. Find the partner's actual partnership share on the relevant date. The relevant date—
    1. if the partner was a partner on the effective date of the transfer of the relevant chargeable interest to the partnership, is that date,
    2. if the partner became a partner after that date, is the date on which the partner became a partner.
  2. Add to that partnership share any increases in the partner's partnership share which—
    1. occur in the period starting on the day after the relevant date and ending immediately before the land transfer, and
    2. count for this purpose.
  3. Deduct from the increased partnership share any decreases in the partner's partnership share which occur in the period starting on the day after the relevant date and ending immediately before the land transfer. The result is the partnership share attributable to the partner. If this result is below zero, the partnership share attributable to the partner is zero.

The result is the increased partnership share. An increase counts for the purpose of paragraph (b) only if any tax payable in respect of the transfer which resulted in the increase has been duly paid under this Act.

The relevant chargeable interest is the chargeable interest which ceases to be partnership property as a result of the land transfer, or where the land transfer is the creation of a chargeable interest, the chargeable interest out of which that interest is created.

Any LBTT due when the partnership acquired the chargeable interest must have been paid. If this is not the case calculate the partnership share as zero.

To benefit from the SLP deduction, the existing partner must be a member of the partnership at the effective date. If they have left the partnership, calculate the partnership share as zero.

 

Example: transfer from a partnership – the lower proportion

From the apportionments Partner A has 100%.

From the partnership Partner A has a 25% share. 

Therefore, the lower proportion for Partner A is 25%.

 

The sum of lower proportions

Step 5: Add together the lower proportions for each corresponding partner. The result is the sum of the lower proportions (SLP).

Once you have a figure for the SLP, you can calculate the chargeable consideration.

 

Example: transfer from a partnership – the sum of lower proportions

The lower proportion for Partner A is 25%.

Calculate the chargeable consideration by using the following formula:

MV x (100-25) % 

Discount the chargeable consideration starting with the market value by 25%. This takes account of Partner A’s retained interest in the chargeable interest. 

For further guidance see:

 

Transfer of an interest from a partnership where all partners are bodies corporate

Where immediately before the land transfer all the partners are bodies corporate and the sum of lower proportions is 75 or more, the chargeable consideration for the land transfer is the market value of the interest. 

If the chargeable consideration includes rent, please refer to LBTT7005 Transfer involving leases.

It is possible that group relief may be available.

For further guidance see:

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