The Finance Bill received Royal Assent yesterday (21 July 2008). The new Act includes measures that mitigate the partnership provisions introduced in Finance Act 2007. Up until Finance Act 2007 the commonly accepted SDLT position for partnerships was that changes of partnership interest without consideration would not be chargeable to SDLT. The Finance Act 2007 altered this by making any change in partnership interests chargeable, regardless of whether there was consideration. After intensive lobbying the Government accepted that the effect of those changes would be to unfairly impose SDLT on multiple occasions on funds that invested in property and then brought in investors after the property had been purchased. The Finance Act 2008 addresses these concerns.
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The Finance Bill received Royal Assent yesterday (21 July 2008). The new Act includes measures that mitigate the partnership provisions introduced in Finance Act 2007. Up until Finance Act 2007 the commonly accepted SDLT position for partnerships was that changes of partnership interest without consideration would not be chargeable to SDLT. The Finance Act 2007 altered this by making any change in partnership interests chargeable, regardless of whether there was consideration. After intensive lobbying the Government accepted that the effect of those changes would be to unfairly impose SDLT on multiple occasions on funds that invested in property and then brought in investors after the property had been purchased. The Finance Act 2008 addresses these concerns.
The basic premise of the new provisions is that full SDLT must be paid on acquisition of the property if future changes in partnership interests are to be exempt. Where one of the original partners or an individual connected to one of the partners brings the property into the partnership full SDLT would not be paid. Therefore, the legislation now provides that an election may be made to pay SDLT on the full market value of the property contributed notwithstanding that the contributor may retain some interest in the property. Although the effect of making the election is that more tax is paid initially, the tax (and administrative) saving is that future dealings in the partnership interest other than for consideration may then be possible without incurring a further SDLT charge.
Any fund that would pay less than full SDLT on the acquisition of a property will want to seriously consider whether making an election to pay full SDLT offers a long term tax saving. For example, suppose an investment group owns a property in its current portfolio and wishes to use that property to seed a new investment fund that will be set up as a limited partnership. The property is currently owned by company A and is transferred into a partnership between company A and company B (another company in the group) in exchange for the full market value funded by partnership level borrowing secured on the property. The partnership shares are A 99% and B 1%. On contribution, SDLT would only be chargeable on 1% of the market value. When other investors contribute their capital in return for a partnership interest thereby increasing the amount of partnership capital which may be used to repay the partnership debt, the percentage interest in the partnership held by A and B would be diluted, but they would retain the same economic stake. However, despite the fact that no capital would be withdrawn by A, an SDLT charge would still be imposed on each dilution of A's and B's share. In this situation an election to pay on the full market value on the initial contribution might well be desirable as the investor contributions would then be exempt. However, it should be noted that where an investor contributes less than £150,000 this would fall beneath the threshold for paying SDLT. Therefore, where a fund is directed at investors that are to contribute less than £150,000, a market value election is unlikely to be desirable.
Where property is purchased by the partnership directly from a third party full SDLT would be paid at the outset and there would be no need for an election. The legislation allows for retrospective elections going back approximately one year. Existing property investment funds should therefore revisit investments made in this period to ascertain whether it would be desirable to make an election. It is not necessarily sufficient just to identify whether full SDLT was paid on acquisition. Where the property is bought by a partnership from a company connected to one or both of the partners the effect would be an SDLT charge on the full market value, but this alone would not be sufficient to remove the charge on future changes in the partnership interest for no consideration. In this case, it appears that in order for future transfers to escape charge, the legislation requires that an election be made. The effect of this would be to cancel the original charge on market value, and replace it with another charge on market value! In practical terms this should not be too difficult, but it does require attention.
The Finance Act 2008 changes do not mean that the sale of a partnership interest (whether through a transfer of the partnership interest or through a withdrawal of capital) will be SDLT free. The Finance Act 2008 rules do not operate to allow trading of partnership interests free of SDLT. However, one situation in which the new rules will help is in the context of the establishment of a new fund. For example, a promoter (that does not become a partner) may establish a fund that acquires a property from a third party for 10. It is intended that this should be financed with 4 of equity and 6 of debt. At the time of acquisition of the property, equity of only 1 has been put in. Therefore, the promoter makes a temporary loan of 3 to the partnership. Once the remaining investors are found and a further 3 of equity is put in, the temporary loan is repaid. The Finance Act 2008 rules ensure that SDLT does not become chargeable by reference to the dilution of the partnership shares of the original investors. Under the Finance Act 2007 rules, SDLT would have become chargeable even though no consideration flowed through to the original investors.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 22/07/2008.