Taxation Questions on Formation of Property Partnerships

by Readers Question

21:46 PM, 26th October 2018
About 3 weeks ago

Taxation Questions on Formation of Property Partnerships

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Taxation Questions on Formation of Property Partnerships

I am trying to establish the CGT and Stamp Duty position on the basis of two unrelated individuals forming an ordinary partnership (not an LLP).

To simplify matters to begin with, let us assume they both own six residential rental properties worth £200,000 each, and each of those properties has a mortgage of £100,000 secured against it. In other words, each individual is contributing £1,200,000 of property into the partnership and £600,000 of mortgage liability.

Now let us assume that each partner acquired his property portfolio for £600,000. In other words, each partners property portfolio is pregnant with capital gains of £600,000.

Let us also assume that each of the properties are HMO’s and that HMRC will accept that each of the landlords is running a business in accordance with the Ramsay Principles.

The reasons for the partnership formation are commercial, i.e. not tax motivated. For example, the properties in each of the portfolio’s are in two cities and it makes commercial sense for the partners to manage the properties closest to them. Each partner agrees to share all income, expenditure, risk, profit and loss pro-rata to the equity being invested into the partnership.

My initial questions are:-

  1. Does the legal and/or beneficial ownership of the properties need to be transferred into joint ownership in order for the partnership to be legitimate?
  2. Are capital gains crystallised by the formation of a partnership in this instance?
  3. Is Stamp Duty payable upon formation of the partnership?

If you could point me to legislation and/or HMRC manuals supporting any answers that would be very much appreciated.

Now to complicate this slightly.

If the mortgage liabilities of partner A were say £500,000 but the mortgage liabilities of partner B were say £700,000 (whilst everything else remains the same), would that change the answers to the three questions above? If so, in what way and why?



Comments

Mark Alexander

21:54 PM, 26th October 2018
About 3 weeks ago

What a superb set of questions!

I have published your article but it is far too late on a Friday evening for me to consider attempting to answer them (too many glasses of wine already) so please bear with me.

I will admit, even without the wine, these are very 'taxing' questions (pun intended!) so I will need to consider this carefully and revert to HMRC's tax manuals before responding. I'm incredibly busy at the moment so it might take me a while to respond.

I will also invite our Hon. Legal Counsel (Mark Smith of Cotswold Barristers) to consider these questions.

Meanwhile, if any other accountants or tax specialists are brave enough to have a stab at answering these questions, I look forward to reading their comments.

acctsol

18:34 PM, 29th October 2018
About 2 weeks ago

My initial thoughts are as follows.

beneficial ownership should be registered
CGT crystallized - I would say no
stamp duty - I would say no

re affect on the additional mortgage liabilities on answers above the base cost would need to be quantified

the above is my initial reaction but I would need further clarifications/reading up on manuals to be able to determine how comfortable I am with my 'back of a fag packet' conclusion

would be interested to hear others

Mark Alexander

18:46 PM, 29th October 2018
About 2 weeks ago

Reply to the comment left by acctsol at 29/10/2018 - 18:34
With respect, your notes do not make sense.

Mark Smith (Barrister-At-Law)

19:07 PM, 29th October 2018
About 2 weeks ago

Does the legal and/or beneficial ownership of the properties need to be transferred into joint ownership in order for the partnership to be legitimate?
NO, THE BENEFICIAL INTEREST IN PROPERTY CAN BE HELD ON TRUST FOR A PARTNERSHIP BY THE LEGAL OWNER
Are capital gains crystallised by the formation of a partnership in this instance?
ON THE ASSUMPTION OF DEBT HELD BY ONE PARTNER BY THE OTHER-YES. OTHERWISE NO.
Is Stamp Duty payable upon formation of the partnership? LET'S SEE--
Transfer of chargeable interest to a partnership: general
10(1)This paragraph applies where—
(a)a partner transfers a chargeable interest to the partnership, or
(b)a person transfers a chargeable interest to a partnership in return for an interest in the partnership, or
(c)a person connected with—
(i)a partner, or
(ii)a person who becomes a partner as a result of or in connection with the transfer, transfers a chargeable interest to the partnership.
It applies whether the transfer is in connection with the formation of the partnership or is a transfer to an existing partnership.
(2)The chargeable consideration for the transaction shall (subject to paragraph 13) be taken to be equal to—

where—

RCP is the relevant chargeable proportion,
MV is the market value of the interest transferred, and
AC is the actual consideration for the transaction.
(3)The relevant chargeable proportion in relation to the market value of the interest transferred is—

where SLP is the sum of the lower proportions.

(4)The relevant chargeable proportion in relation to the actual consideration for the transaction is—

where SLP is the sum of the lower proportions.

Mark Alexander

19:44 PM, 29th October 2018
About 2 weeks ago

Reply to the comment left by Mark Smith (Barrister-At-Law) at 29/10/2018 - 19:07
Thank you Mark, is the legislation you're quoting in relation to Stamp Duty FA2003/Sch15 as amended by FA2004/Sch41?

Mark Smith (Barrister-At-Law)

19:50 PM, 29th October 2018
About 2 weeks ago

Reply to the comment left by Mark Alexander at 29/10/2018 - 19:44
Yes it is. There is no fixed answer to the question of SDLT for non-connected partners-it all depends on the consideration. If only connected partners enter the partnership there is no SDLT.


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