Guidance on Partnership Transactions Involving Chargeable Interests and Rent Calculations

LTT on transfers and lease dealings involving partnerships

Land Transaction Tax has special rules for land and lease transactions involving partnerships, because some of the same people may still have an economic interest after the deal. Depending on the facts, LTT may be based on market value, a reduced proportion using the SLP, or a comparison of two partnership calculations, with the higher result used.

• When land moves from one partnership to another, both the “transfer to partnership” and “transfer from partnership” rules may apply, and tax is worked out on both before using the higher amount.
• If the two partnerships have no partners in common, the SLP is zero, so there is no reduction for overlapping ownership.
• For lease transactions, rent and non-rent consideration are treated separately: rent is taxed by reference to its net present value, while non-rent elements may be based on market value, with the partnership proportion then applied.
• If a partnership is made up entirely of companies, and land is transferred to one of those companies or a connected person with an SLP of 75% or more, the chargeable consideration is taken to be market value.
• Group relief may sometimes be available in corporate cases, but it is not automatic and cannot be claimed if the partners and transferee are not within the same group as required by the legislation.
• These rules are fact-sensitive, so it is important to identify the partners before and after the transaction, calculate the SLP correctly, and check whether rent, a premium, or both are involved.

Scroll down for the full analysis.

LTT on partnership-to-partnership transfers and partnership lease transactions

This page explains how Land Transaction Tax applies when land or a lease moves between partnerships, or between a partnership and a partner, under the special partnership rules in Schedule 7 to the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act. These rules matter because ordinary consideration rules do not always apply. Instead, tax may be based on market value, on a reduced proportion of value or rent, or on a comparison between two different partnership calculations.

What this rule is about

Partnership transactions are taxed under special rules because the people who own the land economically before and after the transaction may overlap. If the same people remain involved through the partnership structure, the legislation may reduce the taxable amount by reference to the sum of lower proportions, often shortened to SLP.

The source material deals with three related situations:

• a transfer of a chargeable interest from one partnership to another partnership;
• a transfer from a partnership made up entirely of companies to one of those companies, or to a person connected with it; and
• leases involving a partnership and a partner or former partner, where part of the consideration is rent.

The main purpose of these rules is to stop the same transaction being taxed twice under overlapping partnership provisions, while also preventing under-taxation where the parties are closely connected.

What the official source says

Where land is transferred from one partnership to another partnership, it is possible that both sets of special rules could apply at the same time:

• the rules for a transfer to a partnership; and
• the rules for a transfer from a partnership.

In that case, the legislation does not stack both charges together. Instead, the taxpayer must calculate the chargeable consideration under each set of rules separately and then work out the tax on the higher amount.

If there are no partners in common between the two partnerships, the SLP is zero. The source says that in that case the transaction is an ordinary partnership transaction.

Where any part of the consideration is rent, special lease rules apply. For a partnership-to-partnership transfer where there are partners in common, the tax on the rent element is the greater of:

• the tax that would arise if the lease rules were applied as a transfer to a partnership transaction; and
• the tax that would arise if the lease rules were applied as a transfer from a partnership transaction.

The source also says that the lease rule which removes the zero rate band for non-rent consideration where the rent exceeds the relevant amount also applies to transfers from one partnership to another.

For transfers from a partnership consisting wholly of bodies corporate, a stricter rule can apply. Where:

• all partners are companies;
• the transfer is to one of those partners or to a person connected with that partner; and
• the SLP is 75% or more,

the chargeable consideration is taken to be the market value of the interest transferred.

If part of the consideration includes rent, the chargeable consideration includes both:

• the net present value of the rent over the lease term; and
• the market value of the lease.

The source adds that group relief may be available if the statutory conditions are met. But it also makes clear that relief cannot be claimed if the partners are not all in the same group and the transferee is not in that group.

For leases granted to or by a partnership in dealings with a partner, a person becoming a partner in connection with the grant, or a former partner, paragraph 31 modifies the normal partnership rules. LTT is charged on:

• a proportion of the net present value of the rent payable over the term; and
• a proportion of any consideration other than rent, with market value used for that element.

The relevant proportion is based on:

(100 − SLP)%

So under the source material:

• the taxable rent element is the NPV of rent multiplied by (100 − SLP)%; and
• the taxable non-rent element is market value multiplied by (100 − SLP)%.

Finally, where a lease is transferred or granted from a partnership made up entirely of companies to another company that is or has been a partner, and the SLP is 75% or more, market value treatment applies, subject to any available group relief.

What this means in practice

The practical starting point is that partnership transactions are not analysed in the same way as a sale between unconnected parties. You need to ask who the partners are before and after the transaction, whether any of them overlap, and whether the transaction involves rent, a premium, or both.

In a transfer from one partnership to another, the legislation recognises that the transaction may fit both the “transfer in” and “transfer out” rules. Rather than charging tax twice, it requires two calculations and uses the higher result. That means the transaction must be tested from both directions.

If there are no common partners, the overlap that drives the SLP adjustment disappears. The source says the SLP will then be zero. In broad practical terms, that means there is no reduction for continuing economic ownership through common partners.

For lease transactions, rent and non-rent consideration are treated differently. Rent is taxed by reference to its net present value under the ordinary lease valuation rules, but only the relevant proportion is charged under the partnership modifications. Non-rent consideration, such as a premium, is not simply taken at face value under the source material here. Instead, the calculation uses market value and applies the same proportional reduction.

The corporate partnership rule is especially important because it can replace a reduced partnership calculation with a full market value charge. If all partners are companies, the transferee is one of those companies or connected with one, and the SLP reaches 75% or more, the legislation treats market value as the chargeable consideration. That can produce a much larger tax charge than a proportionate calculation would have done.

How to analyse it

A sensible way to approach these rules is to work through the following questions.

• What exactly is being transferred: freehold land, an existing lease, or the grant of a new lease?
• Is the transfer from one partnership to another, from a partner to a partnership, or from a partnership to a partner or former partner?
• Who are the partners before and after the transaction?
• Are there partners in common between the two partnerships?
• What is the SLP for the transaction?
• Does the consideration include rent, non-rent consideration, or both?
• If this is a partnership-to-partnership transfer, have both the “transfer to” and “transfer from” calculations been done?
• If all partners are companies, does the 75% SLP rule trigger market value treatment?
• If market value treatment applies in a corporate group context, are the conditions for group relief actually satisfied?

For lease cases, it is important to separate the rent element from the non-rent element. The rent element is measured by NPV. The non-rent element is measured by market value under the source material described here. The relevant taxable proportion is then applied.

For partnership-to-partnership lease transactions involving common partners, the rent calculation must be tested both ways and the greater tax result used.

Example

This is only an illustration of the mechanism described in the source.

Partnership A transfers a leasehold interest to Partnership B. Some partners are the same in both partnerships, so the SLP is not zero. The transaction includes both a premium and ongoing rent.

The parties cannot simply choose one partnership rule and ignore the other. They must:

• calculate the chargeable consideration under the transfer-to-partnership rules;
• calculate it again under the transfer-from-partnership rules; and
• pay tax by reference to the higher result.

For the rent element, they must compare the tax that would arise under the lease rules applied to each of those two partnership calculations, and use the greater amount.

If, instead, the transferring partnership consisted entirely of companies, the transferee was one of those corporate partners, and the SLP was 75% or more, the chargeable consideration would be market value. If the lease involved rent, the NPV of the rent would also need to be brought into account in the way described by the source.

Why this can be difficult in practice

The hardest part is often not the arithmetic but identifying which special rule applies and whether more than one rule applies at the same time.

Several points are especially fact-sensitive:

• working out who counts as a partner at the relevant time;
• deciding whether a person becomes a partner “as a result of” or “in connection with” the grant of a lease;
• calculating the SLP correctly;
• separating rent from other consideration; and
• checking whether the all-corporate 75% market value rule is triggered.

Another practical difficulty is that the source refers to group relief only briefly. Whether group relief is available depends on the statutory conditions being met. The source makes one important negative point clearly: if the partners are not all in the same group and the transferee is not in that same group, relief cannot be claimed. But that does not mean relief is automatic in every other case.

Lease transactions can also be easy to misread. A reader might assume that rent is always taxed under the ordinary lease rules and the partnership rules only affect a premium. The source shows that this is not correct. Rent is also modified by the partnership provisions, and in some partnership-to-partnership cases the legislation requires a comparison of two possible rent charges.

Key takeaways

• Where land moves from one partnership to another, both the “transfer to” and “transfer from” partnership rules may need to be calculated, with tax charged on the higher result.
• For lease transactions, rent and non-rent consideration are dealt with separately, and the rent charge may require a comparison between two different partnership calculations.
• Where a partnership is made up entirely of companies and the SLP is 75% or more, market value treatment can apply, although group relief may still be relevant if the statutory conditions are met.

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Useful article? You may find it helpful to read the original guidance here: Guidance on Partnership Transactions Involving Chargeable Interests and Rent Calculations

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