Farmers up and down the country are reviewing the ownership of their land and properties in an attempt to mitigate the effects of the changes to Agricultural Property Relief and Business Property Relief that were announced in the Autumn 2024 Budget and which are now enshrined in draft legislation.
An often overlooked tax that needs to be considered when transferring land and property is SDLT. The SDLT rules that apply to partnerships have been described by other commentators as “beyond understanding”. We asked Sam Stent, an SDLT specialist at Scrutton Bland, for her thoughts. She described these rules as “quirky with a dash of absolute nonsense” but she has nonetheless attempted to explain them for us!
Farming clients will mainly own land in one of three ways:
- Owned personally (but used by farming partnership or limited company)
- As a partnership asset
- Within a limited company
If a farming family wish to pass wealth down to the younger generation as part of their Inheritance Tax planning strategy, in most cases Capital Gains Tax will not be an issue (as Holdover Relief can be claimed where it is agricultural land that is being transferred) so SDLT is likely to be one of the main costs.
In relation to assets which are owned personally and transferred to another individual, SDLT will be payable if there are charges in place against the gifted property. Although no cash might change hands, debt attaching to transferred property is deemed to be ‘consideration’ for SDLT purposes. For example, if the owners of Farmy Farm borrowed £1m to purchase a new combine and the lender put a £1m charge against the farmland, a subsequent gift of that farmland would trigger an SDLT liability of £39,500.
It is worth noting that there is no spouse exemption for SDLT, so transfers between husband and wife are also caught where property is charged or mortgaged.
SDLT costs can of course be mitigated on transfers between individuals by asking banks to remove spent charges from properties or to move charges onto different properties that are not going to be transferred.
If, however, the land at Farmy Farm was instead transferred into the Farmy Farm Family Partnership, zero SDLT will be payable if all the partners are close relatives. However, where the partners include wider family members (e.g. aunts, uncles, nieces and nephews) or unrelated individuals, SDLT charges will arise and will be based upon the income profit-shares in the partnership, irrespective of whose land capital account the property is credited to. Take the case of a property that is transferred by dad into a partnership whose partners are dad, son and niece where profits are shared equally (1/3 each). Even if the property is wholly credited to dad’s capital account on the partnership balance sheet, SDLT will still be payable on 1/3 of the value of the property (i.e. the profit share attributable to the niece who is a wider family member). See, we told you the rules made no sense!!
In terms of SDLT for assets which are already within a partnership, no SDLT charges will arise on transfer from one partner’s capital account to another capital account as long as the land remains within the partnership and there is no change to partnership profit-sharing ratios. This is the case whether the land is charged or mortgaged or totally debt free. Confused yet?!
If land is transferred out of a farming partnership to one or more of the partners, again no SDLT would usually be payable if all the partners are close relatives (but, as above, it could apply to partnerships which include wider family members and unrelated partners).
If land is owned within a limited company, SDLT is unlikely to be an issue as any transfer of value would be via a share transfer as opposed to a land transfer. At least that one is straightforward!
In most cases, the potential IHT savings (at 50% x 40% of the value of the transferred land and property) far outweigh the SDLT costs, but careful thought will still need to be given as to how any SDLT liability is to be funded. As explained above, transfers into family partnerships can often avoid any up front SDLT costs. However, following a transfer into a partnership, a liability to SDLT could still arise in the future in either of the following situations:
- Where there is a withdrawal of capital from the partnership by the partner who transferred the land to the partnership within three years of the transfer (so transfers of property into partnerships in the run up to retirement are to be avoided!); or
- Where a person has transferred land to a partnership and subsequently transfers some of their interest in the partnership ‘pursuant to arrangements which were in place’ at the time the land was transferred. A ‘transfer of a partnership interest’ can occur by simply changing the profit-sharing ratios and this is something that often goes hand in hand with estate planning to avoid falling foul of IHT reservation of benefit rules. This rule is particularly nightmarish as there is no time limit, meaning it can theoretically apply indefinitely, and none of the usual partnership SDLT exemptions for close family members apply. Sam’s advice from an SDLT perspective is that when land is transferred into a partnership, profit sharing ratios should ideally be fixed percentages with no intention for them to be changed for the foreseeable future.
If you need SDLT advice in relation to your estate planning, Sam can help you navigate these strange and unusual rules and she can be contacted on samantha.stent@scruttonbland.co.uk.
*the views expressed are the author's and not ICAEW's