When a business is incorporated, people are generally aware of the various capital gains tax reliefs available (e.g. section 162 incorporation relief) but stamp duty land tax (SDLT) should not be forgotten about.
Often the main asset to be transferred into a company is goodwill (on which there is no SDLT) but there may also be properties of significant value. This could be the case for a trading business with a large office premises, or (particularly) for a property investment business. For example, a £1M commercial property would trigger SDLT of £39,500 in the hands of the recipient company and this liability would be higher for residential property.
There seems to be something of a myth doing the rounds that SDLT can fairly easily be avoided in these situations by simply becoming a partnership before incorporation. This is not quite true.
Partnership SDLT rules are a bit of a law to themselves and it is fair to say that this is not particularly user-friendly legislation. However, it is true that there are some quite friendly (if illogical) rules for determining the SDLT when a partnership incorporates. Usually the analysis will be that no SDLT will be payable. This is the result of a fairly complicated equation (‘sum of lower proportions’) which ends up with the result that if family members of a partnership incorporate, then there will be no SDLT on property which is transferred to the company.
This has led some advisors (often ‘scheme’ providers) to advise businesses to ‘get round’ SDLT on an incorporation by becoming a partnership. Great care should be taken here. This is because if HMRC can show that a partnership was inserted to avoid an SDLT charge then any charge could be based on market value instead. This is based on rules set out in section 75A to section 75C of Finance Act 2003. These rules would often be in point where a partnership is ‘set up’ shortly before incorporation.
Although partnerships which are set up specifically before incorporation may not be effective for SDLT purposes, it may be possible in certain cases to argue that partnerships already exist. Husband and wife business owners are a classic example of this.
Here the business structure will often be informal with no partnership agreement and no partnership tax returns having been submitted. This does not necessarily mean that a partnership does not exist. Under the 1890 partnership act a partnership is defined as ‘the relation which subsists between persons carrying on a business in common with a view of profit’ and this relationship will often exist between husband and wife, even if not documented as such. In such circumstances it will likely be preferable to seek to argue that a robust partnership has always existed, rather than to seek to create something before an incorporation, which HMRC may then seek to attack.
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