LBTT7011 - Property investment partnerships

LBTT guidance on property investment partnerships.

A property investment partnership (PIP) is a partnership whose sole or main activity is investing or dealing in chargeable interests. The partnership does not need to be conducting construction operations (as defined by section 74 of the Finance Act 2004) in order to be considered as a property investment partnership for the purposes of LBTT.

The provisions about PIPs in Part 7 of schedule 17 to the LBTT(S)A 2013 concern a very narrow class of partnerships, namely those whose sole or main activity is investing in or dealing in property. In other words they are firms speculating in property rather than house building firms. Given that the assets of the firm are chargeable interests, there is potentially scope for avoidance by using the partnership as a vehicle for movements of property, with transfer of ownership of property avoiding tax by being represented only by the transfer of the holding partnership shares.

Accordingly, the shares in the partnership transferred are taxed based on the market value pro rata of underlying chargeable assets. A similar approach is available in section 47 of the LBTT(S)A 2013 for the Scottish Ministers to make regulations in respect of residential property holding companies.

LBTT(S)A 2013 schedule 17 paragraph 31

The PIP can hold interests in land that would be chargeable interests but for the fact that land is outwith Scotland, and still fall within the definition of property investment partnership.

Where the relevant partnership property includes a chargeable interest, a transfer of an interest in a PIP is treated as a chargeable land transaction for the purposes of LBTT.

The buyer in the land transaction is either the partner who increases their partnership share as a result of the transfer, or a person who joins the partnership.

The chargeable consideration for the purposes of LBTT is equal to a proportion of the market value of relevant partnership property which is:

  • for a person acquiring an interest in the partnership for the first time, their share in the partnership just after the transfer; or
  • if the person acquiring an interest in the partnership is already a partner, the difference between the partnership share before and after the transfer.

There are two different forms of transfer of an interest in a partnership: Type A and Type B.

A Type A transfer is a transfer which takes the form of arrangements entered into under which:

  • the whole or part of a partner’s interest is acquired by another partner, or a another person, and money or money’s worth is given by the partner or person acquiring the interest; or
  • a person becomes a partner, and  the interest of an existing partner is reduced, or they leave the partnership, and there is a withdrawal of money or money’s worth by the existing partner of money or money’s worth that was not available to the partnership prior to the transfer.

Any other form of transfer is a Type B transfer.

For a Type A transfer, relevant partnership property includes all chargeable interests held by a partnership immediately after the transfer with the exception of:

  • chargeable interests transferred to the partnership as part of the transaction;
  • market rent leases; and
  • any other chargeable interest that is not attributable economically to the interest in the partnership that is being transferred.

For a Type B transfer, relevant partnership property includes all chargeable interests held by a partnership immediately after the transfer with the exception of:

  • chargeable interests transferred to the partnership as part of the transaction;
  • market rent leases;
  • any other chargeable interest that is not attributable economically to the interest in the partnership that is being transferred;
  • any transfer of a chargeable interest where the buyer has elected to disapply the rules relating to the transfer of a chargeable interest to a partnership; and
  • any transfer of a chargeable interest that was not made by a partner, someone becoming a partner or a person connected with a partner.

The transfer of an interest in a property investment partnership is treated as a chargeable interest for the purposes of the withdrawal of group relief.

LBTT(S)A 2013 schedule 17 paragraph 35

Market rent leases

A lease held as partnership property immediately after a transfer of an interest in the partnership is not relevant partnership property for either a Type A or a Type B transfer if the following four conditions are met:

The first condition is that:

  • no chargeable consideration other than rent has been given in respect of the grant of the lease; and
  • no arrangements are in place at the time of the transfer for any chargeable consideration other than rent to be given in respect of the grant of the lease.

The second condition is that the rent payable under the lease as granted was a market rent at the time of the grant.

The third condition is that:

  • the term of the lease is five years or less; or
  • if the term of the lease is more than five years:
    • the lease provides for the rent payable under it to be reviewed at least once in every five years of the term; and
    • the rent payable under the lease as a result of a review is required to be a market rent at the review date.

The fourth condition is that there has been no change to the lease since it was granted which would have the effect of making the rent payable under the lease less than a market rent.

The market rent of a lease at any time is the rent which the lease might reasonably be expected to fetch at that time in the open market.

A review date is a date from which the rent determined as a result of a rent review is payable.

LBTT(S)A 2013 schedule 17 paragraph 33

Exchanges of partnership interests

Where a partner acquires an interest in a partnership and the consideration for that interest is the transfer of land to an existing partner (as distinct from the partnership), the interest in the partnership shall be treated as a major interest in land if the relevant partnership property includes a major interest in land.

The usual rules in relation to exchanges apply (see LBTT5002), with the exception of the rules about the division or partition of a chargeable interest.

LBTT(S)A 2013 schedule 17 paragraph 34

Election by a PIP to disapply Part 4 rules

In a transfer of a chargeable interest to a PIP, the buyer can elect for the rules in relation to transfers of a chargeable interest to a partnership (see LBTT7005) not to apply. If an election is made, the rules in relation to transfers of a chargeable interest from a partnership (see LBTT7008), are also disapplied.

Where an election is made, the chargeable consideration is taken to be the market value of the chargeable interest and the transaction is treated as an ordinary partnership transaction (see LBTT7004).

An election under this paragraph must be included in the LBTT return made in respect of the transaction or in an amendment of that return. Such an election is irrevocable and a LBTT return may not be amended so as to withdraw the election.

Where an election under this paragraph in respect of a transaction (the ‘main transaction’) is made in an amendment of a LBTT return:

  • the election has effect as if it had been made on the date on which the LBTT return was made; and
  • any LBTT return in respect of an affected transaction may be amended (within the period allowed for amendment of that return) to take account of that election.

‘Affected transaction’, in relation to the main transaction, means a PIP transaction with an effective date on or after the effective date of the main transaction.

LBTT(S)A 2013 schedule 17 paragraph 35

Ref ID: 
LBTT7011
Archive Date: 
9 March 2015
Last updated: 
9 March 2015
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