The following set of rules is an anti-avoidance provision to stop persons understating consideration and then making up the difference to the seller by value shifting partnership shares.
The transfer of an interest in a partnership (‘the partnership transfer’) subsequent to a land transfer of a chargeable interest into a partnership is a chargeable land transaction for the purposes of LBTT if the partnership transfer arrangements were in place at the time of the land transfer. The land transfer and the partnership transfer are treated as linked transactions.
This provision is in place to prevent the deliberate increasing of a share in a partnership when there is a transfer of land into the partnership. This would decrease the LBTT liability by artificially reducing the partnership shares of the other partners so that the sum of lower proportions arrived at is lower than it is in reality.
The chargeable consideration is a proportion of the market value (see LBTT2016), at the date of the partnership transfer, of the interest that was transferred by the land transfer. The proportion is either:
- if the party making the partnership transfer is not a partner after the partnership transfer, their share in the partnership before the partnership; or
- if the party making the partnership transfer is a partner immediately after the transfer, the difference between that person’s partnership share before and after the partnership transfer.
For instance, a person with 100% ownership of a chargeable interest transfers it to a partnership of three, of which they are a partner. The three partners are equal partners, but in order to mitigate their LBTT liability at the time, the partner who used to own the chargeable interest takes a 90% share in the partnership, and the other two have their share reduced to 5% each. They agree that they will later adjust their partnerships shares back to a third each in six months’ time.
When the land transfer occurs, the sum of lower proportions will operate to discount the chargeable consideration to only 10% of the market value because of the 90% share of the partner who is bringing the chargeable interest to the partnership.
Six months later, the partners adjust their shares back to a third each. The partnership will require to pay LBTT on the partnership transfer, and the chargeable consideration will be the proportion of the market value of chargeable interest at the time of the land transfer equivalent to the partner who is reducing their share from 90% to 33.3%, so the chargeable consideration will be 56.7% of the market value of the subjects of the land transfer.
Any partner who becomes a partner as a consequence of the partnership transfer will become a responsible partner, and those who were partners who were partners prior to the transfer and remain partners after the transfer are also responsible partners.