When a chargeable interest is transferred to a partnership by:
- a partner;
- a person who will become a partner; or
- a person connected to either the partner or person who will become a partner,
then the rules in Part 4 of schedule 17 to the LBTT(S)A 2013 apply. A property-investment partnership may elect to disapply the rules of Part 4 however.
The rules apply whether the transfer is in connection with the formation of a partnership or is a transfer to an existing partnership.
Certain events following the transfer of a chargeable interest to a partnership are treated as land transactions:
- transfer of a partnership interest pursuant to arrangements that were in place at the time of a land transfer – see LBTT7006; and
- withdrawal of money etc. from partnership after transfer or chargeable interest – see LBTT7007.
Calculating the chargeable consideration
The rules include a formula that is used for determining the chargeable consideration in a land transfer involving the transfer of a chargeable interest to a partnership. The objective of the formula is to reduce the LBTT payable on the land transfer to reflect the continuing economic interest in the chargeable interest through being a partner.
The formula for calculating the chargeable consideration is as follows:
MV x (100 – SLP)%
Where MV is the market value (see LBTT2016) and SLP is the Sum of Lower Proportions.
The sum of lower proportions is the ‘retained interest’ of the transferor, and is expressed as a percentage of the ownership retained or treated as retained by the transferor.
To take a simple example, if one partner transfers a chargeable interest that they have 100% ownership over into a partnership of four partners who each have an equal share in the partnership, the partnership will only pay LBTT over the 75% to reflect the partner’s 25% ‘retained interest’.
Where a transaction falls within both Section 22 and Part 4 of Schedule 17, Schedule 17 takes priority to determine the chargeable consideration.
There is a five step process to determine the sum of lower proportions:
Identify the relevant owner, or relevant owners. A person is a relevant owner if:
- immediately before the transaction, they were entitled to a proportion of the chargeable interest; and
- immediately after the transaction they were a partner in the partnership or connected to a partner.
For the purposes of determining the sum of lower proportions, any persons who are joint owners of a chargeable interest are treated as common owners in equal shares.
This example illustrates how to identify the relevant owners.
A plot of land is owned by a husband and wife. The husband has a 50% share and the wife has a 50% share. The land is transferred to a partnership of four partners, the husband is one of the four partners and has a share of 40% in the partnership. The remaining three partners have equal shares of 20%.
In this example, the husband is a relevant owner as he has 50% ownership of the land prior to the land transfer and will still be a partner after the land transfer.
Despite the fact that the wife is not a member of the partnership, she is a relevant owner as she did have 50% ownership of the land prior to the land transfer and she is a connected person (by virtue of section 1122(5)(a) of the Corporation Tax Act 2010) as regards her husband, and is thus a relevant owner in respect of the partnership by virtue of her husband’s membership of the partnership.
Identify the corresponding partner or partners for each relevant owner. The person is a corresponding partner if, immediately after the land transfer, the person:
- is a partner; and
- the person is the relevant owner or is an individual connected with the relevant owner (if the relevant owner is only connected with a partner that is a company, then there is no corresponding partner).
For the purposes of the second category, a company is treated as a connected person with the relevant owner in so far as the company holds the property as trustee or is connected with the relevant owner by virtue of section 1122(6) of the Corporation Tax Act 2010.
To continue with the example, the wife is not a partner and therefore she cannot be a corresponding partner. However, her husband is a partner and a connected person. He is a corresponding partner as he is a partner after the land transfer takes place and is a relevant owner. The other three partners are not corresponding partners, as they are not individuals connected with the relevant owner.
It is possible that there is no relevant owner with a corresponding partner, for instance if a person leaves the partnership when the land transfer occurs. If this is the case, the sum of lower proportions is nil and the LBTT is charged on the full market value of the chargeable interest with no discount, as the transferor has not retained their interest in the chargeable interest.
Determine the proportion of the entitlement to the chargeable interest being transferred for each relevant owner immediately prior to the land transfer.
That proportion should then be apportioned between any one or more of the relevant owner’s corresponding partners. It should be noted that there is discretion as to how this apportionment is done by the taxpayer.
To continue with the example, the husband and wife are both relevant owners. Prior to the land transfer, they were each entitled to 50% of the chargeable interest. The husband’s 50% is apportioned only to himself as he is his only corresponding partner. The wife’s 50% proportion is apportioned directly to her husband, who is her only corresponding partner. Therefore 100% can be apportioned to the husband.
For each corresponding partner find the lower proportion. This is the lower of either:
- the sums of the apportioned entitlements found as a result of step 3; or
- the partner’s partnership share after the land transfer.
To continue with the example, the husband has 50% from his wife and a further 50%, bringing a total of 100%.
The husband has a 40% partnership income share. Therefore, the lower proportion for the husband is 40%.
Add together the lower proportions as determined at step 4.
To continue with the example, the lower proportion for the husband is 40%. The partnership determines the LBTT due by using the following formula:
MV x (100-40) % and so the chargeable consideration (which must be the market value as it is a transfer from a partner to a partnership) payment is discounted by 40% to reflect the husband’s retained interest in the chargeable interest and the fact that he has a 40% share in the partnership and the application of the connected persons test in respect of his wife’s previous 50% share is also taken into account.
If the partners each had equal shares, i.e. a 25% share each, the LBTT would be calculated slightly differently.
Each partner would have a 25% share, so the husband’s lower proportion would be 25% in this case instead of 40%. Therefore, the Sum of Lower Proportions would amount to 25% in that case. MV x (100-25)% is used for the purposes of determining the chargeable consideration.
Moreover, if the chargeable interest was not in joint ownership before it was transferred to the partnership, it would be calculated differently too.
For step 1, only the husband would be a relevant owner.
For step 2, only the husband would have a corresponding partner, which would be himself.
For step 3, the relevant owner/husband was entitled to 100% of the chargeable interest prior to the land transfer. This would be apportioned only to himself.
For step 4, for the husband is the only corresponding partner, so the lower of what is apportioned to the corresponding partners or their partnership share is 25%.
For step 5, there is only the 25% to add together, so the LBTT is calculated by the following formula:
MV x (100 – 25) %
This means that the LBTT is discounted by 25% to reflect the retained interest of the partner who brought the chargeable interest to the partnership.