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SDLT on incorporating pship with passive partner

SDLT relief on incorporation of trading partnership with income sharing and capital only partners

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My client is a general partnership. They run a garage on the ground floor, and receive rent from the adjoining commercial premises (a retail shop) and a residential flat on top. The rental and trading income is divided 50:50 between two partners (who are brothers). A third brother used to be a profit sharing partner but retired and by *verbal* agreement with his brothers no longer has any entitlement to the rental or trading income. By the same agreement, however, he is entitled to a 1/3 share of the proceeds in the event of the sale of the freehold. Partnership is registered with HMRC with all three partners. Partners intend to retire within a 10 year timeframe and sell up the freehold.

There are considerable tax savings from incorporating the trading business. I was advising the client to leave the property income from the shop and flat as a property partnership as they are basic rate taxpayers anyway (so no mortgage interest relief restrictions) and the whole fuss with the mortgage and solicitors on changing the title deeds to the company seemed excessively costly.

However, one of the profit sharing partners is looking to buy a house and wishes to save stamp duty arising at 3% on purchase of a second home. At the moment he is subject to the charge due to his interest in the upstairs flat. The saving of potentially £15k potentially makes the whole transaction with solicitors etc. worthwhile.

My questions: 

1) I've heard but I'm not sure that wrapping up the residential flat into a company helps with the 3% second home SDLT charge? Could anyone point me in the right direction?

2) As I understand it, in a case of a trading partnership registered with HMRC like this there will be no SDLT arising if - and only if - the incorporated company is owned in the exact same proportion as the partnership (Finance Act 2003 schedule 15 paragraph 18). I'm thinking of incorporating with a class of "A ordinary" "B ordinary" parri passu shares and "C Ordinary" shares entitled parri passu to proceeds on winding up but not to any dividends? But is this kind of semi exotic instrument going to immediately provoke HMRC interest? Is there any point in incorporating separate companies for the trading and property concerns?

My gut feeling is that overall there is just not enough reason to incorporate the property partnership but I promised my client I would investigate all angles properly.

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By The Dullard
13th Nov 2019 14:18

1) The 3% charge applies where somebody already has "a major interest" in a dwellingy and partnerships are generally transparent for SDLT purposes (an LLP being able to be the holding company of a group for SDLT group relief purposes being the only exception I can think of), so currently your would be homebuyer partner has a pre-existing major interest in a dwelling. Moving the dwelling to a limited company, which is opaque for all SDLT purposes, fixes that problem, particularly if there is no SDLT going in.

2) Where a property is transferred from a partnership to a limited company controlled by the partners or persons connected with the partners (like their brothers) there will not be any SDLT. The matching shareholdings isn't necessary for SDLT purposes.

3) Where matching shareholdings will be required is to get incorporation relief. I think your A, B, C plan works (it's not as anathema, in this sort of situation, as everybody seems to think).

4) I don't think moving the property to a company is, necessarily, as difficult or costly as you think. You'll need the existing lender on board, and probably plans to refinance immediately after transfer (by way of a deed of trust), which will increase the borrowing costs, so a decent mortgage broker is also a must.

The alternative is to move the existing property to an LLP with the same ownership (no taxes going in) and terms, keeping the business in the existing partnership, which is then incorporated. The LLP could then have a subsidiary to which it could grant or interpose a long lease over the dwelling (CGT but no SDLT) to get around the 3% problem.

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By JohnShallcross
28th Nov 2019 11:11

On point 1), about the 3% surcharge, I agree with The Dullard.

I wrote about it in my Case Notes; see the entry of 15 November 2019 linked here:

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