Unravelling the complexities of SDLT incorporation relief

Posted: 05/01/2017

Many property owners are looking at the possibility of transferring their properties to companies in order to avoid the restriction on income tax relief for interest payments made on loans taken out in the course of a residential property letting business.

There is however no SDLT relief for incorporating a business. Indeed, even worse, when a property is transferred to a company which is connected with the transferor, there is a deemed market value acquisition by the company for SDLT purposes, whatever the price actually paid. Therefore, there is in fact an incorporation charge, not a relief. So what is this article about?

The answer is that the SDLT partnership rules operate in such a way that 100% relief may be due on the transfer of a property to a company owned by the partnership. The rules are complex, almost to the point of being unintelligible, but in the right circumstances no SDLT is payable.

First things first – is the property owned by a partnership? HMRC says that the mere joint ownership of a rented property does not amount to a partnership between the joint owners. It requires that the joint owners actively carry on a business together, so HMRC would expect the relief only to be claimed where the owners are all involved actively in the letting of the properties.

Although the active involvement test is relevant for deciding whether a property is owned by an ordinary partnership, it is not relevant where a property is owned for a limited partnership or by a limited liability partnership – the SDLT partnership legislation automatically applies to properties held for LPs or by LLPs. However, the owners are likely also to be looking for capital gains tax relief on transferring the properties into companies, and this requires that they are carrying on a business. The case of Ramsay v HMRC (2013) suggests that this requirement is in practice very similar to the active involvement test.

If a property is not currently owned by a partnership, can the owner(s) restructure so that it is, and still claim the relief? For instance, a sole owner might consider transferring an interest in the property to someone else in order to commence a partnership, or joint owners may consider actively managing a let property which had hitherto been let passively. SDLT is full of anti-avoidance provisions these days and it could well be that trying to force oneself into a partnership structure would fall foul of one of these.

Even if the partnership test is passed with flying colours, the relief is not inevitable.

First, the relief broadly only applies to the extent that the partners are ‘connected’ with the company. If all of the partners are (close) relatives of each other, they are connected with one another and with the company. If some of the partners are not related to the others, they will nevertheless be deemed to be connected with them if they are acting together to secure or exercise control of the company.

It is not certain what ’acting together to secure or exercise control’ of a company means. There is some case law on this topic but it leaves unanswered questions. On balance it seems likely that, if the properties are to be transferred to the company in return for an issue of shares to all of the shareholders, it should be possible to arrange that this occurs as a result of the shareholders acting together to secure or exercise control of the company.     

Secondly, the relief only generally applies if SDLT was properly paid on the purchase of the property by the partnership, and only to the extent that the proper amount of SDLT was paid on any increase in a partner’s share occurring since the purchase of the property. (There is generally a deemed market value acquisition of a proportion of the properties in a partnership where an interest in the partnership is increased.)

There does not appear to be a huge rationale for these rules. Why can a partnership incorporate without paying SDLT, when a sole property owner carrying on exactly the same business cannot? Furthermore, because the rules were not specifically designed to deal with incorporations, the way they apply to incorporations looks very arbitrary. In any event the Government should consider clarifying the way the connected persons’ rules apply in this situation.

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