John the Bachelor, had been in a property investment partnership for many, many years, along with his three best friends, Big John, Jonno and Derek; each owning 25%.
One day Derek says he would like to retire and as John was the only partner with any spare cash, it was agreed that he would buy Derek’s share for £2.5m. 25% of the net asset value.
Prior to John’s investment, the partnership had a property portfolio of £45m, with borrowing attached of £35m, giving a net partnership assets of £10m.
They drafted up a simple letter between themselves. “No need to incur any legal fees Delboy, let’s keep this nice and simple.” John said.
They signed. John paid the monies and they all went down the pub to send Derek off in style. Job done!
Time passes by and out of the blue, John receives a brown envelope demanding £552,000 in Stamp Duty Land Tax plus interest.
“What the…!?” John shouted.
John did not understand that there would be a SDLT charge on buying Dereks 25% interest in the partnership.
John was also unaware that the SDLT charge would be based on the property portfolios GROSS VALUE.
John had increased his profit share from 25% to 50% and is therefore treated as having acquired a 25% interest in a property portfolio worth £45m.
The major drawbacks of property investment partnerships is the danger of incurring SDLT whenever a partner:
Introduces property into a partnership;
Takes property out of a partnership;
Changes their profit share; or
Withdraws partners capital within 3 years of introducing property into the partnership.
So what’s the moral of this story…
The amount paid for the partnership share has no bearing on the amount of SDLT payable.
Anyone using a property investment partnership should try and get the profit share right at the outset.
If they had used a property investment company instead, then John would only have paid Stamp Duty at 0.5% i.e. £12,500, which represents a considerable saving of £539,500!
The charge on company shares would have been based on the actual amount paid for the shares, and not the gross value of the underlying properties.
That’s John in the tree…don’t be like John…
Article by Simon Howley ATT CTA ATA AFA MIPA