The Stamp Duty Land Tax ("SDLT") treatment for partnerships (including the Danish K/S structure) which invest in UK land will soon become much more adverse.

The current regime/exemption

SDLT is already chargeable on the transfer of a share in such a partnership.  However, there is an exception.  No SDLT is chargeable where:

(a) a new investor subscribes for new shares in a partnership;

(b) another investor retires from the partnership; and

(c) any capital withdrawn by the retiring investor is financed by the partnership's existing cash resources (i.e. not financed by the incoming investor or lenders).

Major change in regime proposed by Clause 71 Finance Bill 2007

Clause 71 Finance Bill 2007 proposes a further change to the SDLT regime.  The change will take effect when the Finance Bill receives Royal Assent which is expected to be some time in July 2007.

Under the new regime, the exception will no longer apply at all.  Therefore, SDLT will be chargeable whenever a new investor takes a share in a partnership, regardless of whether this is by transfer or subscription for a new share and regardless of whether or not there is another investor who retires and withdraws capital.

The K/S will have had to have completed on the purchase of the property before Royal Assent in order to avoid the new regime applying - exchange of contracts will not be sufficient.

Effect of the change in regime on the typical K/S structure

The new regime will have an adverse effect on the typical K/S structure for investing in UK land. 

The new investors (subscribing for shares in the K/S) will have to pay SDLT in respect of their investment (i.e. their proportion of the market value of the property within the K/S, with no deduction being made for any debt in the K/S), even though SDLT has already been paid by the K/S in respect of the purchase of the land. 

The double charge to SDLT is likely to result in the investment becoming uneconomic.

Possible solution to the problem

There is a possible structure for overcoming the difficulty presented by the new regime. 

Subject to certain exceptions and qualifications, an alternative structure (to the K/S structure) can be put in place, the end result of which would be that the property is held by a Danish limited partnership company ("P/S"). 

The P/S has the same tax transparency as a K/S but there would be no further SDLT charge to the new investors.  Any future sales by investors of their interest in the P/S will be subject to SDLT in the usual way.

The main differences between a K/S and a P/S is that the latter is required to have a minimum paid in capital of DKK 500,000 (similar to a Danish A/S) and that the Danish Companies Act regulates certain aspects of the P/S relating to formation, power to sign for the company, the content of the Articles of Association and registration. As such, the P/S, therefore, has the added advantage of being a more regulated company than a K/S.

From a practical point of view, the capital requirements etc. of a P/S would usually already be fulfilled in a typical K/S structure. Certain adjustments relating in particular to tax and financing issues will, however, have to be implemented when transforming the K/S structure to a P/S structure and various practical issues addressed.

Further advice

This note has been prepared jointly by Field Fisher Waterhouse and Kromann Reumert both acting for various Danish companies active in the UK property market.  This note is the basis of a longer memo which explains the structures in more detail and which is available to clients of the firms.

For further information contact Edward Bannister or Nick Beecham of Field Fisher Waterhouse LLP or Teis Wormslev or Arne Møllin Ottosen of Kromann Reumert.