I found a Stamp Duty Land Tax and Capital Gains Tax tribunal case rather interesting recently. It showed that a lot of care and attention is needed when transferring property from a partnership ...
SDLT relief applies when a property is transferred from a partnership where both individuals are connected with the other. However, you must establish if a formal partnership is in existence.
Three conditions must be met:
- There must be a business
- The business must be carried on by two or more persons in common
- The business must be carried on with the view to making a profit
It is up to the taxpayer to determine that the partnership existed at the time.
So, if the transfer meets the above conditions, then SDLT relief applies and the CGT is deferred until the property is sold. Put simply, the partners are transferring property from the partnership to a limited company in return for shares in that company.
But HMRC raised an enquiry into the SDLT return of the Cooke's. If the transfer qualifies, then SDLT is nil so no SDLT1 return is required. For CGT, if the conditions are met, incorporation relief is automatic for the partners. They also decided to look into their personal tax returns once the SDLT enquiry was closed.
Well, Mr and Mrs Cooke purchased a country estate in 1989, but did it in their personal names. Various developments happened on site and they obtained planning permission for another property in 2014.
Then they created a partnership called R&E Cooke Partnership, which engaged SC Properties Limited (which was also owned by the Cookes) to carry out the building work. The work was carried out and the partnership agreed to sell the property to SC Properties Limited for just £1. It was then sold by SCP to a third party in 2017.
The transfer from the partnership to the limited company could potentially have qualified, however, once HMRC and the tribunal looked at the case, it became apparent that the existence of the partnership was in question.
They had partnership accounts and tax returns as well as emails between the Cookes and their advisors confirming the creation of the partnership, but the planning application was granted to Mr Cooke personally, there was no partnership agreement, a joint bank account rather than one in the partnership's name and the partnership was registered after the date of the sale of the property.
It was considered that a partnership between spouses could be less formal, but this was contested by the tribunal judge as a legal partnership was supposed to go above and beyond a spousal relationship
And given the amount of work performed by SC Properties Limited, an ordinary person engaging a company would not enter into an agreement without some sort of documentation.
The final nail in the coffin of the Cookes was that all agreements and documentation were in their personal names. The partnership never issued invoices or signed any contracts and therefore, the judge decided, had no intention to generate profits.
And finally, selling the property to SCP for a nominal sum meant the uplift in value of the property fell to SCP rather than the partnership. Again, clearly no intention to generate profits from the partnership.
Therefore SDLT was chargeable on the transfer, and incorporation relief was denied, so CGT was charged at the market value of the property, which sold for £1.6m.
So, be absolutely sure that any documentation reflects the relationship you understand to be in place, and if HMRC queries you, make sure that your evidence will stand up to scrutiny.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.