Where a chargeable interest is transferred from a partnership to a person who is or has been one of the partners, or is a person connected with such a person, then LBTT will apply to the transfer. In other words, this applies where an interest in land is effectively going out of the partnership (the opposite of LBTT7005 which concerns an interest going into a partnership).
As with the transfer of a chargeable interest to a partnership, the objective is to reduce the LBTT liability by a proportion to reflect the person’s prior economic interest in the chargeable interest when it was held by the partnership. The same formula applies:
MV x (100 – SLP)%
Where MV is the market value (see LBTT2016) and SLP is the Sum of Lower Proportions.
Where a transaction falls within both Section 22 and Part 5 of Schedule 17, Schedule 17 takes priority to determine the chargeable consideration.
- A partnership owns a property which it wishes to transfer to a limited company, D.
- The partnership consists of three partners (individuals A, B and C) whose share of profits in the partnership are 40%, 30% and 30%, respectively.
- The partners are unconnected for the purposes of Schedule 17, other than B and C, who are married.
- B owns and controls the limited company, D. C therefore also controls D as their spouse’s rights are attributed to them in determining control.
- The property has a market value of £500,000.
- When the property is transferred to D, D pays only £300,000.
- The sellers in the transaction are deemed to be the three individual partners, per Para 3, Sch 17.
- Section 1122 of the Corporation Tax Act 2010 (connected persons) has effect for the purposes of Sections 22 and 23. Therefore, each partner is connected with the company.
- As a result, the transfer to the company is deemed to be not less than market value, by Section 22. In this case, the chargeable consideration would be the full market value of £500,000.
- However, the transaction also falls to be taxed under Part 5, Sch17 as the transfer is from a partnership to a person who is or has been one of the partners, or from a partnership to a person connected with a person who is or has been one of the partners.
- The sum of the lower proportions is calculated in accordance with Para 22 of Sch 17 and is 60. The calculation of chargeable consideration under Para 21 is therefore MV x (100-60)% = £200,000.
- Where the provisions of both Section 22 and Part 5 of Sch 17 apply to a transfer of a chargeable interest from a partnership to a company, the provisions of Part 5 will take precedence to determine the chargeable consideration.
As a result, even though the Section 22 charge would be £500,000, what is actually chargeable is the proportion determined by Para 21 of Sch 17, which is £200,000.
The SLP in relation to the land transfer is determined in the following five steps.
Identify the relevant owner, or relevant owners. A relevant owner is a person who:
- is entitled to a proportion of the chargeable interest immediately after the land transfer; and
- was a partner or connected to a partner immediately before the land transfer.
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
For example, a farming partnership of four partners own a 400 acre farm. One of the partners wishes to leave the partnership, and is taking 100 acres of land that she owns out of the partnership. The exiting partner is a relevant owner.
Identify the corresponding partner or partners for each relevant owner. The person is a corresponding partner if, immediately before the land transfer, the person:
- was a partner; and
- was the relevant owner or was an individual connected with the relevant owner.
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 only by virtue of section 1122(6) of the Corporation Tax Act 2010.
To continue with the example, the exiting partner is also their own corresponding partner.
It is possible that a relevant owner does not have a corresponding partner (other than the relevant owner).
Determine the proportion of the entitlement to the chargeable interest being transferred for each relevant owner immediately after the land transfer.
That proportion should then be apportioned between each relevant owner’s corresponding partners. It should be noted that there is discretion as to how the apportionment is done by the tax payer.
To continue with the example, the exiting partner will have 100% of the chargeable interest. They will apportion the 100% only to themselves as corresponding partner.
For each corresponding partner find the lower proportions. This is the lowest of either:
- the apportioned entitlement found as a result of step 3; or
- the partnership share attributable to the partner prior to the land transfer (see below).
To continue with the example, the exiting partner has 100% of apportioned entitlement and had a 25% share in the partnership so the lowest proportion is 25%.
Add together the lower proportions as determined at step 4.
To continue with the example, the exiting partner is the only party with a lower proportion that needs to be added, so the total of the lower proportions is 25%.
The LBTT liability is found by inserting the sum of the lower proportions into the following formula:
MV x (100 – 25)% and so the LBTT payment is reduced by 25% and this reflects the exiting partner’s prior 25% share in the partnership.
There are special rules that apply for determining the partnership share attributable to the partner in step 4, for the purpose of working out the sum of lower proportions, where the land transaction involves a chargeable interest going out of a partnership.
In order to benefit from the LBTT discount that arises as a result of the sum of lower proportions, the exiting partner must still be a member of the partnership at the effective date on which the land transaction occurs. If they have left the partnership, then the partnership share attributable to that partner is zero, and there will be no LBTT discount as a result.
Where the exiting partner is a member of the partnership up until the land transfer in which the chargeable interest in question ceases to be partnership property, the following steps should be taken:
Find the exiting partner’s share in the partnership on the ‘relevant date’ which is either the effective date of the transfer of the chargeable interest to the partnership, or, if the partner did not join the partnership until after that effective date, the date on which they joined the partnership.
Add to that partnership share any increase in the partner’s share that occurs after the relevant date and immediately before the effective date. It should be noted that the increase in partnership share can only be used for the purpose of determining the partnership share attributable to the partner if LBTT was paid on the land transfer that took place when they acquired the increased partnership share.
Deduct from the increase in the partnership share any decreases in the partnership share that have occurred between the relevant date and 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.
A worked example illustrating the above is provided separately on our website under LBTT Worked Examples.