In this week’s Q&A, WE, explains the capital gains tax implications when members of a limited liability partnership want to sell out
- We act for a limited liability partnership (LLP) and it owns four commercial properties let out to various third parties. There are two unconnected members of the LLP sharing capital and profits 50/50, and they want to part ways and take two properties each.
One of the members has mentioned that they then want to transfer their two properties to a personal company. What tax issues could arise?
- I gather that the members are not incorporating the LLP rental properties but are intending to extract the properties from the LLP, transfer them into personal ownership and then one of the owners then wants to transfer their personally owned properties to a personal company.
At present, for capital gains tax implications (CGT) purposes the members jointly have an interest in all four of the LLP properties.
After the transfer out of the LLP, they will still have the same joint ownership. If they then exchange ownership to result in sole ownership of two properties each then that is a barter transaction for CGT purposes and so would give rise to a capital gains disposal.
Rollover relief may be available under section 248A Taxation of Chargeable Gains Act 1992 (TCGA 1992). The onward transfer to a personal company would be a CGT disposal at market value and no holdover relief would be available under either s165 or s260.
Whether there is a business being operated that qualifies for incorporation relief under s162 is another matter. HMRC’s views on what is a business for this purpose is set out in HMRC manual CG65715.
The transfer of the properties from the LLP to the members will fall under para 18 Sch 15 Finance Act 2003 (FA 2003) for stamp duty land tax (SDLT) purposes.
If the properties remain in joint ownership with joint profit entitlement, then there will be no SDLT charge as the ‘sum of the lower proportions’ will be 100.
The subsequent exchange of properties into personal ownership should be exempt from SDLT as a partition under para 6 Sch 4 FA 2003 if there is no other consideration.
There will be a market value SDLT charge under s53 FA 2003 on the transfer of properties to a connected company.
If there are leases in place, then there will be tax issues to address on the cancellation or assignment of existing leases or the issue of new leases. There may also be capital allowances repercussions to consider if there are qualifying fixtures in the properties.
The above outlines the main tax issues that arise from the proposed transactions. The next step will be to review the tax issues in more detail, consider whether it is possible to mitigate the potential tax liabilities and to consider possible alternatives.