How do I transfer a partnership to a limited company with no SDLT
31/01/2020
A property can be transferred from a partnership to a limited company and there is no Stamp Duty Land Tax (SDLT) liability to pay. The upsides to this structure are clear, especially as transfers from connected parties of a company pay full stamp duty at the additional rate (read more on this here - Stamp Duty for Individual/s Transferring Property to Company). There are however a number of criteria for the partnership to meet with to prove it is a partnership before it can benefit from a transfer to the company. We explain in this article who can be in a partnership, what criteria a partnership must meet, how to transfer a property from a partnership to a limited company and what the new company should have to protect itself in the future.
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Who can be in a partnership?
Before you transfer from a partnership to a company you need to first review who can be in the partnership. A partnership can be friends, family, business partners and a husband and wife. The property legal title doesn't need to be in the partnership name as any of the partners can hold the property on trust for the partnership.
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How do you create a property partnership?
The Partnership Act 1890 allows for a minimum of two partners with no upper limit and a company can be one of the partners. Each partner shares responsibility for the partnership, however roles can be defined within a partnership agreement. In order to prove you are a partnership you must have:
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Operate as a business - the partners need to be running the the property as a business not an investment. Read more below on the difference between the two below.
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Separate bank account - the rent is paid into the partnership's separate bank account.
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Partnership Agreement - the partners need a partnership agreement to confirm the rights and responsibilities of the partners. We can help draft a partnership agreement if you need one.
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Register the partnership- the partnership must be registered at HMRC. You can do this by clicking here - Set up a business partnership
The partnership must be a business, not an investment
The difference may not sound material, however the objective of the relief is to allow a trading partnership that is run as a business to transfer to a limited company without incurring additional taxes. The objective isn't to allow landlords to just swap investment properties into a partnership and then to a company to avoid Stamp Duty Land Tax. The purpose of this relief is to allow a trading partnership that is run as a business to change its entity to a company and to not incur the SDLT charge for doing so because it is one trading business transferring to another trading business controlled/owned by exactly the same owners (partners/directors).
Elisabeth Moyne Ramsay v HM Revenue and Customs 2013 set a precedent for what is to be expected of an investor to prove that the partnership is run as a business and not just an investment. Ms Ramsay won here case of proving the partnership was a business and not just an investment because:
- she worked on the property 20 hours or more a week
- she had no other job
- she handled the every day running and maintenance herself
It is worth reviewing this case to see if your move from a partnership to a company would pass the same tests applied by the Judge. Get it wrong and you'll incur the SDLT, interest and penalties.
Speak to a tax specialist or get a solicitor quote for the transfer
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How to transfer a property from a partnership to a limited company?
The partnership and the company are separate legal entities and should be represented by two separate, independent solicitors. The process will follow the same route as the standard conveyancing process for a sale and purchase in an arms length transaction. If the company is getting a a mortgage then the mortgage lender will likely need the directors to give a mortgage guarantee and obtain independent legal advice (separate to the sale and the purchase). The time frame with no mortgages involved can take a matter of weeks, however if the company needs to obtain a mortgage then the conveyancing solicitor will need to do more detailed investigations into the legal title and the special requirements of the mortgage lender thus adding more time onto the transaction.
We have separate solicitors who can handle the sale, purchase and the independent legal advice. Calls us today to discuss on 0207 112 5388 or click here to get a quote.
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What does the new company need to do?
Once, or even before, you transfer the property from the partnership to the company, you should think about how the property is going to be run by the company and ways the shareholders here are a list of things the company needs to do:
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Shareholders Agreement- the principles behind a shareholders agreement are similar to that of a partnership agreement. The shareholders put in writing their intentions for the company, the responsibilities, the ownership structure and the process to sell or buy shares. For example, without a shareholders agreement the shareholders can look to sell their shares to anyone they want to. A shareholders agreement creates a control to protect the interests of the shareholders.
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Update Buy to Let Agreement- if there is a tenant who is going to remain in the property then the tenancy agreement needs to be updated and the deposit transferred into a 'Deposit Protection Scheme' in the name of the company. You can read more on this here - Buying a property with a sitting tenant.
Do you need help transferring property to a company?
Here are a list of services we can offer:
- Specialist conveyancing solicitor for sale and purchase
- Drafting shareholders agreement
- Direct Guarantee Legal Advice
Links and Sources:
HMRC - Special provisions relating to partnerships: Stamp Duty implications of Schedule 15 - Example
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