HMRC announced last month that, contrary to its previously held view, it now regards an LLP as a ‘body corporate’ for the purposes of both SDLT and stamp duty group relief. According to HMRC, the main consequence of this change is that an LLP can now be the parent in a group structure.
In the real estate sector, LLPs are more commonly used as advisory or management entities (as opposed to asset owning entities which generally take the form of limited partnerships or unit trusts). To that extent therefore, the change in HMRC practice is likely to have only a limited impact on the industry, and on transactions involving real estate.
However, the revised guidance makes for interesting reading, especially for joint ventures where no one partner has a 75% interest.
LLPs and SDLT group relief
Members of a group can claim relief from SDLT on the transfer of any interest in land from one group member to another. Very broadly, a ‘group’ for SDLT purposes exists where:
- one company is a 75% subsidiary of another; or
- two companies are 75% subsidiaries of a third company.
‘Company’ is defined for these purposes to mean a ‘body corporate’, but the 75% ownership test looks at the beneficial ownership of a body corporate’s issued ordinary share capital and this beneficial ownership can be direct ownership or ownership through another company or companies, provided that each body in the series owns ordinary share capital of the body immediately below it in the series.
HMRC’s previous approach
HMRC’s previous (unpublished) practice was to treat the term ‘body corporate’ for these purposes as not including an LLP. Accordingly, it took the view that LLPs should be disregarded (‘looked through’) when considering whether a group relationship existed. The basis for this practice is unclear - there is no doubt that, as a matter of general law, an LLP is a body corporate, though perhaps it came about (wrongly) as a consequence of the rule that, for SDLT purposes, transfers to or by all partnerships, including LLPs, are treated as transfers to or by the partners.
The impact of the change in HMRC’s approach
HMRC now accepts that an LLP is a body corporate for the purposes of SDLT group relief and that it cannot be disregarded in establishing a group relationship. This revision to its practice would appear to reflect the correct view of the underlying law, but the consequences are in some respects surprising.
In particular, as an LLP is a body corporate but has no issued share capital (similar to a company limited by guarantee) its members cannot satisfy the 75% beneficial ownership test and therefore cannot be grouped with the LLP or with any subsidiaries of the LLP (in the latter case, because ownership through a chain of share capital cannot be established).
A summary of the differences between the old approach and new approach is perhaps best illustrated by reference to an example. To see the diagram please click here.
- Transfers between A and X
It appears that HMRC would previously have disregarded the LLP and treated A as holding a 75% interest in X. A and X would then have been grouped for SDLT purposes, and transfers between them should have qualified for group relief. However, under HMRC’s revised guidance, A can no longer be grouped with either the LLP or with X, as the LLP does not have any ordinary share capital. The group is therefore broken above the level of the LLP, and transfers of chargeable interests between A and X cannot qualify for group relief.
- Transfers between the LLP and X
For SDLT purposes, as noted above, there is a deeming provision which treats transfers to or by a partnership (including an LLP) as being transfers to or by the members of the partnership. As a result, transfers of land between the LLP and X are treated as being transfers between A and B (jointly) and X.
As before, under HMRC’s previous practice the LLP would have been disregarded and A and X would have been grouped. Presumably, therefore, group relief would have been allowed as to 75% of the value (representing A’s interest in the land being transferred).
However, HMRC’s revised guidance recognises that, although the deeming provision for SDLT will apply so that the LLP must be looked through to determine the identity of the vendor or purchaser, the LLP remains a body corporate that cannot be disregarded in determining whether or not a group relationship exists.
This means that although technically the LLP forms part of the same group as X and Y, SDLT group relief will never be available on transfers of land between the LLP and X, as the transaction is treated as being between A and B (jointly) and X, and (as explained above) A and B cannot form part of the same group as X.
- Transfers between X and Y
Previously, HMRC viewed X and Y as both being 75% subsidiaries of A, and accordingly as grouped so that transfers between X and Y could qualify for SDLT group relief.
Transfers between X and Y should still qualify for SDLT group relief under HMRC’s revised practice, although in this case the group relationship is established because both X and Y are 100% subsidiaries of the LLP.
- Transfers between A and the LLP
There are specific rules which apply to land transactions between a partnership (including an LLP) and one of the members of the partnership. These rules (not considered further in this bulletin) are separate from the group relief provisions and are not affected by HMRC’s revised guidance.
Now assume that A and B each own 50% of the LLP
Under HMRC’s previous practice, the LLP was disregarded and A and B were each treated as having a 50% interest in X and Y. Accordingly, the 75% ownership test was not met and none of the four companies was grouped with any of the others, so that SDLT group relief would not have been available for transactions between any members of the structure.
Under the current guidance, A (and B) will still not be grouped with any other member of the structure (both because the group is broken above the LLP level due to the absence of share capital and because the individual ownership interests in the LLP are in any event too low). Transactions between A and X will therefore still not qualify for SDLT group relief. Similarly, transfers between the LLP and X (which will be deemed to be between A and B (jointly) and X) will not qualify for group relief.
However, HMRC now accepts that the LLP, X and Y form a group as X and Y are both 100% subsidiaries of the LLP. Transfers between X and Y can therefore benefit from SDLT group relief. This is summarised in the following table please click here.
How will HMRC treat wrongfully claimed SDLT group relief?
HMRC states that where group relief has previously been obtained incorrectly as a result of disregarding an LLP in a group structure (eg a transaction between A and X where A has a 75% or more interest in the LLP), HMRC will not seek to revisit the claim.
HMRC’s announcement is silent on the situation where group relief has previously been incorrectly denied (or where a taxpayer has failed to claim) on the basis of disregarding an LLP in a group structure (eg a transaction between X and Y where none of the LLP members has a 75% interest or greater). If this may be relevant to you, please contact the authors or your usual tax contact for further information.
In broad terms, the effect of this is that, although transfers between 75% subsidiaries of an LLP will be eligible for group relief from SDLT, transfers between the LLP and a subsidiary, and transfers between a member and a subsidiary, will not be so eligible.
Further, the current law puts LLPs at a marked disadvantage compared to both ordinary limited companies and general (or limited) partnerships. To see example scenarios please click here.
In the first situation, a transfer of land from A to X will clearly qualify for SDLT group relief as A can establish an indirect interest of 99% in X through its holding of shares in Subsidiary.
In the third situation, HMRC’s guidance confirms that an ordinary English partnership will be disregarded, and so again a group relationship can be established between A and X with the result that land transfers between A and X can benefit from group relief.
By contrast, where the intermediate entity is an LLP, the group relationship is broken between A and the LLP (because the LLP has no share capital) so that transfers between A and X will not be eligible for group relief.
Stamp duty group relief
The new HMRC guidance does not make it clear whether or not HMRC has in fact changed its position in relation to stamp duty group relief, but for the purposes of comparison, we assume that it has.
As mentioned above, the group relief analysis for stamp duty (which applies to share transfers) is different from the analysis for SDLT (which applies to land transactions) because there is no equivalent of the provisions which ignore the LLP’s body corporate status. That is, there is no equivalent for stamp duty of the deeming provision that treats the members of an LLP as the purchaser/vendor in a transaction entered into by the LLP.
HMRC Stamp Taxes’ previous practice was to treat LLPs as general partnerships (although this is unsupported by the legislation) and where all the conditions were satisfied, HMRC allowed group relief for transfers between associated companies traced through partnerships and also for transfers between a company and a partnership where the partners of the partnership are associated with that company.
Stamp duty group relief operates in a similar manner to SDLT group relief. The relief is available for transfers between bodies corporate that are ‘associated’, and the test for association is the same 75% ownership test as for SDLT (i.e. bodies corporate which are 75% subsidiaries of another or are both 75% subsidiaries of a third body corporate).
As a consequence of treating an LLP as a body corporate for the purposes of stamp duty group relief, an LLP can now be a parent of a group. Accordingly, and in the absence of the deeming rules that apply for SDLT purposes, a transfer of shares or marketable securities between the LLP and X and between and X and Y will qualify for group relief if all the other conditions are satisfied. The revised guidance will not ‘save’ a transfer of shares or marketable securities between X and A or between the LLP and A because the LLP does not have ordinary share capital.
In fact, the revised guidance possibly makes the position worse for transfers of shares between A/B and the LLP where A and B each hold 50% of the LLP. It was arguable under the previous guidance that on a transfer from A to the LLP, only 50% of the asset was effectively being acquired by B so stamp duty was therefore only payable on 50% of the asset value whereas under the revised guidance, stamp duty would appear to be payable on 100% of the asset value.
Using the hypothetical scenario above, our understanding of the position is as follows: to see the table please click here.
HMRC’s guidance confirms that, as English limited and general partnerships do not have legal personalities separate from the persons who are the partners, they must be ‘looked through’ when establishing a grouping relationship for SDLT or stamp duty purposes, and it is therefore possible for the companies that are the partners of an English general or limited partnership to be grouped with companies that are below the partnership in the group structure.
The position of Scottish Limited Partnerships (SLP) is different again. An SLP has a separate legal personality and is able to hold assets in its own name.
For general tax purposes though, an SLP is considered to be transparent and does not have body corporate status. Certainly, the Companies Act 2006 states that an SLP is not a ‘body corporate’ for the purposes of that legislation. However, a Scottish trademark case (Douglas v Phoenix Motors 1970 SLT (Sh-Ct) 57) held that an SLP fell within the meaning of a body corporate for trademark purposes.
HMRC’s guidance states that because SLPs have separate legal personality, they cannot be looked through to determine whether group relief is available but are not a body corporate so cannot be a parent of a group. The transfers between X and Y transactions described above will not, therefore, qualify for relief.
HMRC have confirmed that they will apply the same principles to foreign partnerships as to UK partnerships, on a case by case basis.
If you are dealing with intra group transfers involving an LLP, you should carefully consider the implications of this new HMRC guidance.
The current form of the legislation (as interpreted by HMRC) gives rise to some unexpected consequences.
In particular, it is difficult to see policy reasons for denying group relief from SDLT on transactions between an LLP and its subsidiaries, or from both SDLT and stamp duty on transactions between a member who holds an interest of 75% or more in the LLP and one of the LLPs subsidiaries.
HMRC note that it is ‘actively reviewing’ the group relief legislation for both SDLT and stamp duty to understand how well it reflects the underlying policy aims, and it may be that legislation will be introduced to correct some of these apparent anomalies.
If you have previously determined that group relief is not available on a land transaction or share transfer in reliance on the previous HMRC position, you should consider whether the position could be redressed.
As discussed above, transfers of land between A and X can never qualify for SDLT group relief because the group is broken above the LLP. However, group relief will be available for a land transaction if (a) if the intermediate entity were a company limited by shares (as A would be able to establish indirect ownership of at least 75% of X) or (b) if the intermediary entity were an English general or limited partnership (which can be looked through) enabling a 75% ownership relationship to be established between A and X. It is not readily apparent what policy objective is served by distinguishing LLPs from limited companies and general partnerships in this manner and it is to be hoped that HMRC consider this issue as part of their review of the SDLT and stamp duty group relief rules referred to above.