Under the Finance Act 2004, law firms with expensive property but few partners are likely to be hit hard by SDLT, writes Karen Liddell

Law firms may be seeing rises in property costs as a result of the introduction of stamp duty land tax (SDLT) in the Finance Act of 2004. Not only will SDLT affect acquisitions of interests in land or property by a firm, but also transfers of interests between partners that frequently happen when new partners join a practice or others leave. In broad terms, those practices with high-value property and a small number of partners are likely to feel the greatest impact.


The SDLT was introduced on 1 December 2003 and its scope has been broadened by the Finance Act 2004 to include provisions relating to partnerships. As a result, many transactions between partners may now give rise to a tax charge and impose an additional compliance burden on practices. Three situations that are caught by the new rules include the transfer of land into a partnership by a partner, the transfer of an interest in a partnership, and the transfer of land out of a partnership to a partner.


Where a partner transfers land to a partnership, a charge to SDLT arises, based on the market value of that land and any consideration received. The proportion charged to SDLT depends on the percentage of the interest in land acquired by the other partners.


Suppose the hypothetical law firm of Smith Jones & Green is a partnership and shares profits equally. Mr Smith introduces a property worth £1 million, and so Mr Jones and Mr Green will both face a SDLT charge of £9,900 each (£1 million x 33% x 3%).


Moving on to the transfer of a partnership interest, a charge to SDLT can arise where an existing partner transfers all or part of his partnership interest to another partner for money or money's-worth, or where a person becomes a partner and an existing partner reduces his partnership share (or retires from the partnership) and withdraws money or money's-worth from the partnership.


These clauses are arguably causing the most concern among professional partnerships that have an interest in land and property. While 'payment' must be made in money or money's-worth, there is much debate about how this applies in practice.


In relation to transfer out of a partnership, where land is transferred from a partnership to a partner, SDLT is charged on the person acquiring the interest. While tax relief is often available for that share of the property on which the transferee has already paid SDLT, this is not allowed in all circumstances, so check the position carefully. The first £150,000 per partner is exempt from the SDLT, so many smaller transactions between partners will be exempt.


The Inland Revenue has tried to restrict the charge to land-rich partnerships by drafting clauses to exclude market value leases. However, the legislation does not provide for a complete exclusion for normal commercial leases, for example, those that have upward-only rent reviews.


Karen Liddell is a director in the professional practices group at London-based consultancy Smith & Williamson