Secondary transactions and the proposed reforms to stamp duty

24 July 2023

Reforms to UK stamp duty could mean that partnership interests will be removed from the scope of stamp duty. This will be particularly welcome to fund managers involved in secondary transactions.

Long-awaited changes to the UK’s archaic stamp duty (and stamp duty reserve tax) system are currently the subject of a government consultation. The consultation proposes, amongst other things, to remove the dual stamp duty/stamp duty reserve tax system with a new single tax.

One possible area of relief for fund managers within the consultation is in respect of the stamp tax rules applicable to partnership interests.

The most common application of UK stamp duty, with which many will be familiar, is in the context of a purchase of shares in a UK incorporated company. However, under current law, transfers of partnership interests are also, as a technical matter, potentially subject to UK stamp duty (although the general position adopted is that they are not subject to UK SDRT).

In practice, as HMRC acknowledges in its consultation, stamp duty is not normally paid on the transfer of partnership interests. We see this unfold in practice in two ways. First, there is no legal requirement to submit a transfer to be stamped, so if it is concluded that a stamped transfer of a partnership interest will never be required as a practical matter, stamping the transfer might be viewed as unnecessary (particularly as the absence of a stamped transfer should not prejudice the ability to write up the register of partners to reflect the transfer). Second, if the partnership interest has no UK nexus and the transfer is executed outside of the UK, then the transfer would be out of the scope of stamp duty.

That said, particularly in commercial secondary transactions, parties may (in view of stamp duty concerns) opt to execute a transfer of a partnership interest outside of the UK. In this respect, there is often detailed provision in secondary transaction documents allocating liability between the parties for paying any eventual stamp duty with respect to the transfer.

As a result, while UK stamp duty is unlikely in practice to be an actual cost within secondary transactions and other partnership transfers, its existence can create uncertainty and complication for the parties involved.

It is therefore welcome that the government’s consultation includes a proposal to take partnership interests outside of the scope of stamp duty. Given the technical complexity around stamp duty and partnerships, our expectation would be that fund managers engaged in secondary transactions would be emphatically in favour of the proposal.

One point that should be borne in mind is that the reform (if passed) is intended to be subject to anti-avoidance provisions to prevent partnerships being used as a way of avoiding the new single tax. For instance, this might be achieved by enveloping UK shares in a partnership structure prior to sale.

Macfarlanes has responded to the consultation (members-only content). In our response we voiced our support for the proposal (to remove partnership interests from the scope of stamp duty), and made a number of other observations around the proposed single tax framework which included our reservation on the proposed shorter accountable date.