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  • Katherine Bullock

Escaping SDLT on transfers by partnerships: Waterside Escapes Ltd v HMRC

One of the key advantages of a partnership from an SDLT perspective is the availability of relief in the form of Schedule 15 of the Finance Act 2003. Schedule 15 sets out a formula for working out how much SDLT must be paid where the relevant owner of a property (the company) is or is connected to a corresponding partner. Where the necessary criteria are met and all of the partners are connected to each other and the company, the result of the calculation is no charge.

"Where the necessary criteria are met and all of the partners are connected to each other and the company, the result of the calculation is no charge."

Here is a quick (and broad brush) reminder of the key requirements. To take advantage of the reduction or elimination of SDLT on a property transaction through Schedule 15, there must be a partnership. The formula then provides that the chargeable consideration for SDLT purposes is MV x (100 -SLP)%. MV is the market value of the chargeable interest transferred. SLP is the Sum of the Lower Proportions and refers to the percentage of the relevant owner’s entitlement to the property which is apportioned to each partner who is an individual connected to the company (a corresponding partner). If the partners are connected to each other and to the company, which controls the entire interest in the property, 100 – SLP becomes 100 – 100, resulting in the consideration being MV x 0%, which in turn results in a chargeable consideration of zero.

The question then is who qualifies as a connected person? Family relationships are often the first thing that springs to mind, and as per the Corporation Tax Act 2010 (being the defining legislation for these purposes), spouses and relatives are connected persons for these purposes. However, persons acting together to control a company are also considered to be connected, and so two unrelated individuals who each own 50% of a company and must work in tandem to exercise control would be considered to be connected for the purposes of Schedule 15.

The application of the formula where two unconnected persons act together to control the company was considered recently by the First Tier Tribunal in Waterside Escapes Ltd v HMRC [2020] UKFTT 404(TC), the judgement for which was published last week.

In this case the First Tier Tribunal determined that the 15% SDLT rate applied and the next question was to calculate the effect of the formula and in particular whether the parties were connected for these purposes. The First Tier Tribunal held that in establishing control for these purposes, a person (A) can be attributed the rights and powers of an associate (B) but these do not include the rights and powers attributed to B by an B’s associate (C). It is particularly important to note the forensic examination of board minutes and the shareholders agreement undertaken by the Tribunal in reaching this conclusion.

Waterside Escapes Ltd let holiday properties and as part of its business acquired a property from an LLP. The members of the LLP comprised a husband and wife, who each had a 50% interest. The wife was also a 50% shareholder in the company, the other 50% being held by an unconnected trust that funded the acquisition of the property.

The company argued that both the husband and wife were corresponding partners with the result that the chargeable consideration subject to SDLT should be nil. It was common ground that Schedule 15 applied to the transfer of the chargeable interest because the company was connected to the wife, as a member of the LLP. However, the calculation of the SLP depended on when the trust became a shareholder in the company. The transaction comprised a number of steps and the issue of the shares to the trust was conditional on the property being acquired. It was decided that on the correct analysis of the facts, the trust acquired its shares at the same time as or at the latest immediately after the acquisition of the property. As a result, for the purposes of the calculation, the wife owned 50% and not 100% of the shares in the company. The wife and the trust controlled the company because they acted together to control the company as evidenced by the shareholders’ agreement. Therefore, the wife was connected to the company. She was also connected to the trust and its shares were attributed to her. However, her control of the company and the trust’s shares could not be attributed to the husband because even though he was an associate of the wife, she only controlled the company by acting together with the trust. In relation to the husband, the rights and powers of his associate, the wife, attributed to him did not include the rights and powers of his wife’s associate, the trust. The husband therefore was only attributed with 50% of the shares and was therefore not connected to the company. Consequently, the chargeable consideration was reduced by 50% and not by 100%. A cautionary tale for all drafting the governance documents for family businesses.


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