Is SDLT a hidden GP retirement tax?
SDLT is a tax on transfers of land ownership that many GPs approaching retirement may not realise applies to them. Nils Christiansen, Managing Partner at DR Solicitors, outlines how it works and the key points to be aware of.
Stamp Duty Land Tax (SDLT) is a tax payable on the acquisition of an interest in land. This usually involves a transaction at the Land Registry where the legal ownership of a freehold or leasehold property is transferred from one party to another. It is probably for this reason that SDLT is often seen as a tax to be calculated by solicitors.
In reality, an interest in land can be acquired without ever registering the transaction at the Land Registry. This is because the Land Registry principally identifies the legal interest, whereas the main value in a property is normally in the beneficial interest. When the legal and beneficial owners are not the same, the beneficial owners may not be identified at the Land Registry and need to protect their interest in other ways.
Transfers of legal and beneficial ownership
SDLT is a tax on transfers of both legal and beneficial ownership. The transfer of a legal interest can be identified through the Land Registry (which is why HMRC requires an SDLT return when the Land Registry is changed) but SDLT is a self assessment tax and changes in beneficial ownership should also be reported to HMRC within the usual thirty day deadline.
When a surgery is held as a Partnership Asset, the beneficial ownership is held by the partnership as a whole. Whilst the value (and the ownership rights and obligations) may be restricted to a subset of the partners, this does not alter the fact that the partnership is the ultimate beneficial owner of the surgery.
The relationship between the “owning partners” and the non-owning partners will typically be set out in a Partnership Agreement or Declaration of Trust. This may permit the ‘owning partners’ to retain their interest in the building upon retirement and withdraw their share of the surgery from the Partnership.
When this happens, a transfer of beneficial ownership takes place from the partnership to the retiree. This is a transaction chargeable to SDLT even though there is no transfer required at the Land Registry, as there may well be no change to legal ownership. The calculation is particularly complex because it is not the usual “percentage of total market value” but is instead a calculation based on income profit shares and can require information about changes in income profit sharing ratios dating back to 2003.
For example, if a surgery has multiple owners who all withdraw their shares from the partnership, the total SDLT bill can end up higher than if only one of them had bought it outright.
At this point, you may be thinking “what about the partnership exemption”? It is true that intra-partnership transfers are often exempt, but this is a dispensation which must be checked for every transfer of legal or beneficial interest. Certainly, when a building becomes a Partnership Asset this is not an exempt transfer, and when some, or all, of the building leaves the partnership this is also not exempt. The exemption is simply for transfers of shares between partners in the Partnership Asset. Even then, this may be restricted depending on how long the building has been a Partnership Asset, and how the beneficial ownership was acquired by the partnership.
The problem for GP practices is that most buildings are held as Partnership Assets, but most ”owning partners” consider themselves to have full ownership rights, overlooking the (often undocumented) beneficial ownership rights of the partnership. The lack of new partners willing to buy into the surgery is only making the problem worse, as partners are frequently retiring with their share in the building. Where there is significant value in the building, the SDLT charge on retirement can be large. The top rate of SDLT is currently 5% on commercial property and there are fines and interest to be levied on late payment.
It is generally estimated that up to half of GP surgeries belong to current or former partners, so the number of GPs affected could be very large, particularly given the current wave of retirements.
Hidden SDLT liabilities
Most GPs and professional advisers will be aware of CGT and entrepreneurs relief at retirement, but SDLT liabilities must also be considered. We work with hundreds of practices and are constantly surprised by the lack of awareness of this issue. There is so little awareness that it seems many GPs will have already retired since 2003 without realising that they have incurred an SDLT liability. The key points to be aware of are that any transfer of legal or beneficial ownership in the surgery can potentially trigger an SDLT charge, and making the building a Partnership Asset or removing a share of that asset from the Partnership are chargeable events.
Our advice to anyone who has retired since 2003 and thinks they may have a hidden SDLT liability is to seek the advice of a specialist legal team, who will be able to advise you on where you stand. For GP partners who are planning to retire soon, make sure the additional charge is taken into account when looking at financial planning.
Nils Christiansen, Managing Partner, DR Solicitors
Healthcare Group, March 2017