SDLT charges on asset transfers – what farmers need to know

The degree of change to business structures that is being undertaken in order to line up succession and reduce potential inheritance tax (IHT) liabilities means that decisions are sometimes taken quickly and without looking at the implications for other taxes.

See also: Stamp duty land tax why it is important in a tricky market

One of these is Stamp Duty Land Tax (SDLT), especially as this tax can arise even when no money changes hands, warns Nigel Popplewell, senior tax consultant with accountant PKF Francis Clark.    

Asset transfers and debt

A common oversight is that SDLT will be due if there is a release or an assumption of debt as part of the deal for the transfer of the asset being transferred, for example when farmland is transferred from one generation to the next.

“The release or assumption of debt is a consideration in tax terms, so it is better to obtain a release of the debt first, to pay it off if possible, or to move the security to put it against other assets,” advises Nigel.

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Advisers need to consider whether advising to do this brings with it an obligation to disclose the move to HMRC.

“Otherwise, what is known as a ‘dry’ tax charge arises, where no money has changed hands but tax is due and there’s often no money in the business to pay what can be a large cash sum,” says Nigel.

No spouse exemption

Where a transfer of land with debt takes place between spouses, there is no SDLT exemption so the tax will still arise.

Personal guarantees

“Where it gets tricky is where there are personal guarantees, and this happens a lot in farming, whether trading as a company or a partnership,” says Nigel.

Debt includes an obligation under a guarantee, whether secured or not. So, if, as part of the deal, a guarantor (say Dad) is released from some of the guarantee (by say Son), or the son enters into a guarantee, that can be release or assumption of debt. In such cases an application to defer any SDLT payable can be made to HMRC on the basis the liability is contingent.

Partnership property transfers

If property is transferred into or out of a partnership, as long as all the partners are closely “connected” in tax terms, then there is no SDLT charge.

However, if some of the partners are not from the same immediate family (such as parents and siblings), or are completely unrelated, then there will be an SDLT charge.

The charge is based not on the individual’s capital share in the partnership but on their income profit-share, with the liability falling on those who are not immediately connected, regardless of whose land capital account the property sits in.  

For assets already in a partnership, no SDLT is due when transfers are made from one partner’s capital account to another capital account, provided the land stays in the partnership and there is no change to income profit-sharing ratios. This applies whether the land has debt against it or not.

Beware of time restrictions

However, when land is transferred into a partnership an SDLT liability can still arise if capital is withdrawn from the partnership within three years by the partner who transferred the land to the partnership.

This also catches farming families out, often in cases of partnership disputes and a partnership split results, says Nigel. It is also something to watch for when retirement plans are being made.

Profit share changes can trigger SDLT

An SDLT charge can also arise when land is transferred into a partnership and profit shares are subsequently changed under arrangements to do that at the time the property was transferred in, even when the partners are all closely connected.

There is no time restriction in these instances. 

“The obvious way to avoid an SDLT charge in such cases is to first change the profit-sharing ratios and then introduce the new property to the partnership,” advises Nigel.

But again, such an arrangement may require disclosure to HMRC.

SDLT, like many taxes, is a self-reported tax, notified to HMRC on an SDLT return, so it is up to the taxpayer to calculate what is due. As many taxpayers are unaware of the rules transfers often take place with no SDLT return being made, especially where this is done within families and without professional advice.

The tax can catch up with an individual up to 20 years later if HMRC decides to look into their affairs, possibly triggered by an unrelated matter, if the individual hasn’t submitted an SDLT return for the transfer of the property.