Forming A Partnership To Avoid SDLT On Incorporation

by Mark Alexander

2 months ago

Forming A Partnership To Avoid SDLT On Incorporation

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Forming A Partnership To Avoid SDLT On Incorporation

This isn’t as straight forward as some people would like to think. Therefore, I have written this article to explain many of the pitfalls and to explain why it is so important for you to obtain the right advice.

For example, some people think that forming a partnership one day and incorporating the next solves the problem.

No, No, No, No, NO!

Here are some of the reasons that will not work.

HMRC have very powerful General Anti Abuse Rules which they are allowed to apply under GAAR legislation. This allows allows them to disregard the existence of such sham partnerships and to charge the full SDLT payable.

Also, the creation of the partnership itself can attract further SDLT so you could end up paying twice. Very careful planning is required in this regard when forming a partnership because transfers of property attract SDLT, even between spouses in certain circumstances where mortgages are involved.

On top of this could follow a bill for CGT due to capital gains being crystallised when assets are transferred to a partner. Transfers between spouses are exempt but a transfer to anybody other than your spouse is subject to CGT calculations.

So what are the rules?

If you transfer more than £40,000 of property value to somebody else when forming a partnership then SDLT becomes due. Transfers between spouses can be gifted but the mortgage liabilities will still be treated as a consideration for SDLT purposes. Therefore, to stay below the SDLT threshold the percentage gifted must not equate to more than £40,000 of mortgage liability also being transferred.

If you go into partnership with somebody it must be for a legitimate business reason. For example, if you partner with somebody who can bring skills and experience to the business or you form a partnership with somebody who also owns rental properties then HMRC are far more likely to accept that as being a legitimate business reason and may well grant clearance for incorporation relief to be claimed after just one year. However, if you go into partnership with your spouse, a family member or a friend then HMRC will take a very different view of the situation if they are not genuinely adding value to the business. For example, HMRC could ask what the partner does for the business. If that is a task which you could have employed somebody else to do or outsourced they will ask you why you didn’t do that. And before you go trying to think of your excuses, just remember that HMRC are not daft, they have heard them all before and are very skilled at quickly getting to the truth. All that having been said, if you have been running partnership for three or more years and it genuinely looks and feel like a business operated in earnest and is a serious occupation then you will probably be fine. The case law in Ramsay vs HMRC can be applied to this scenario and often is. Having lost their case against Mrs Ramsay at Upper Tier Tribunal HMRC now apply the criteria set by that ruling to decide whether a business exists, In summary that ruling was that:-

  1. Activities are a serious undertaking earnestly pursued
  2. Activity is a function pursued with reasonable or recognisable continuity
  3. Activity has a certain measure of substance in terms of turnover
  4. Activity is conducted in a regular manner and on sound and recognised business principles
  5. Activities are of a kind which, subject to differences in detail, are commonly made by those who seek to profit from them

Point 4 is an interesting one because it is subjective. Accordingly, I wrote another article a while back which looks at some of “the hallmarks of a business” – LINK HERE

If you are considering the restructure of your business, please remember that we are here to help.

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