Matthew Hutton MA, CTA (fellow), AIIT, TEP, presenter of Monthly Tax Review (MTR), reports on some topical Stamp Duty Land Tax (SDLT) issues discussed at an IBC Conference on 21 May 2008.
The following points were reported by me in an article in Indirect Tax Voice taken from IBC’s Conference on SDLT in London on 21 May. [Clearly, the Finance Bill 2008 has now become the Finance Act 2008 - with changes].
The Speakers: Andrew Campbell of Clarke Willmott (in the Chair); John Watson of Ashurst; Craig Leslie of PricewaterhouseCoopers; Gerald Moran of Hunters; Adrian Shipwright of Pump Court Tax Chambers; Michael Thomas of Gray’s Inn Tax Chambers; Frances Khan and Michael Lyttle of HMRC Stamp Taxes.
Group relief in general
Craig Leslie noted that the relief within FA 2003, Sch 7 Part 1 does not require the companies to be UK resident. Indeed, they do not have to be companies, merely ‘bodies corporate’. This gives rise to certain problems of identification with overseas entities without a share capital. There can be interesting issues with the presence of partnerships within group structures. Under the Stamp Duty regime the Inland Revenue would regard them as breaking the group, whereas for SDLT Sch 7 Part 1 has the effect of looking through the partnership.
Group relief – specific tests
Careful attention is required to the disqualifying arrangements for group relief where the definition of ‘arrangements’ is rather wider under SDLT than under Stamp Duty. For Stamp Duty it was just ‘plan or scheme’ (see Statement of Practice 3/98), whereas for SDLT it includes ‘schemes, arrangements or understandings not in writing’ (see Tax Bulletin 70). Craig Leslie thought that this would have to change following the Budget 2008 changes on group relief.
Quite apart from the disqualifying arrangements, group relief is denied in any case where either the transaction is not effected for bona fide commercial reasons or one of the main purposes of the arrangements is the avoidance of liability to tax. HMRC have published a ‘white list’ setting out the nine circumstances in which group relief should not be denied by virtue of the "no tax avoidance test". Interestingly, some of these present some benign planning opportunities. Circumstance 4 confirms that group relief should be available where it is intended that there will be a subsequent sale of shares in the transferor company and the group wishes to retain the property. In the context of the Budget announcement this will now assist only if it is the transferor company which is to be degrouped.
Similarly, under Finance Bill 2008, a claw-back of group relief can no longer be avoided by first degrouping the vendor (other than by liquidation) prior to the purchaser leaving the group. Under the proposed new para 4AZ in FA 2003 Sch 7 there will be a claw-back if within three years there is a change of control of the purchaser following the vendor’s leaving the group. The problem is that ‘control’ has the meaning given in TA 1988, s 416 which is much broader than that currently used in other tax contexts. Craig Leslie’s first complaint about the new rule was that it is very difficult to see how, with a company with many shareholders, there will not be a change of control within a three-year period – indeed such change of control may be beyond the ability of the transferee/purchaser to prevent.
Craig’s second big complaint about para 4ZA was that, while it is fair enough to catch a change of control on or after 13 March 2008, the provision can link back to an earlier transaction under which the vendor left. He thought that HMRC may be sympathetic to submissions that only degroupings after 12 March 2008 should be caught. More generally, Craig commented that the situation attacked by para 4ZA is better dealt with by a ‘no tax avoidance’ test where HMRC already had the necessary weapons at their disposal.
Group relief claw-back
Andrew Campbell noted that where there is a claw-back of group relief, SDLT is charged not on the consideration paid, but on the market value of the relevant land at the date of transaction: this is the effect of FA 2003, s 53.
Craig Leslie commented that this was a very valuable relief which should be considered more widely. It is especially useful with for example hotels, restaurants, bingo halls etc. The claw-back provisions are similar to those operating for group relief.
The main problem is the requirement for a mirror image share structure before and after the transaction. The existence of subscription shares should be watched (especially where the acquiring company is to be a listed plc), requiring a reduction in the number of shares issued to subscribers. The relief could be disapplied by the existence of options, that is whatever was in issue before, viz, shares, warrants, options etc, need to be given to the shareholders in exactly the same proportions. The main moral is that any share reorganisations, eg putting different classes into a single class, should be done before the reconstruction, warned Craig Leslie.
Special purpose vehicles (SPVs) for residential property
Despite some suggestions that the absence of continuing reference to the pre-Budget Report proposals for SPVs holding residential property, Gerald Moran thought that the matter could still be on HM Treasury’s agenda. He commented that HMT had drawn the wrong conclusions from press reports that (in particular) comparatively few expensive London homes had been registered with the Land Registry, thus provoking suspicions that they had been owned through companies. While a property may be owned by a company, a sale of the property is not the same thing as a sale of the shares in the company. In any event HMT’s proposals were casting the net far too widely, certainly in requiring no tax avoidance motive nor indeed that the SPV did not have to be non-UK resident. And the home can always be intended for letting rather than for occupation by the owner of the SPV. Someone buying a company and owning a house which would be demolished for development would be caught.
Transfers of interests in partnerships
While FB 2008 is generally removing from the SDLT charge the transfer of an interest in a partnership (specifically, under FA 2007, a property-investment partnership) with retrospective effect, the new anti-avoidance provisions are cause for concern suggested Adrian Shipwright. The potential application of FB 2008 Sch 31 had been highlighted in a scenario presented by Kevin Ashman of Lovells. A and B establish a limited partnership into which each subscribes £5 million. The partnership buys property worth £10 million and pays SDLT. Sometime later C subscribes £5 million into the partnership. The partnership buys property for £5 million and pays SDLT.
The question is whether and if so how much SDLT is payable by C on making the subscription of £5 million. The original view expressed by HMRC is that, being a Type A transfer within new sub-para (3A) of Sch 15 para 14, the answer is 4% of £5 million.
There is a Type A transfer if there are arrangements under which:
- a partner transfers the whole or part of his interest as partner to another person (who may be an existing partner);
- a person becomes a partner and an existing partner reduces his interest in the partnership or ceases to be a partner; and
- consideration is given for the transfer.
Otherwise any other transfer is a Type B transfer.
Despite subsequent assurances from HMRC that this would not be a Type A transfer, it is difficult so to read the draft legislation. The problem, said Adrian Shipwright, is that under para 36 of Sch 15 ‘Where a person acquires or increases a partnership share there is a transfer of an interest in the partnership (to that partner and from the other partners)’. This has the consequence of a double charge on (a) the acquisition of a partnership interest and (b) the acquisition of land by the partnership. This issue needs to be resolved.
Withdrawal of money etc from partnership after transfer of chargeable interest
Adrian Shipwright warned of the wide scope of para 17A FA 2003 Sch 15. The rule applies where there has been a transfer of a chargeable interest to a partnership and within the following three years there is ‘a qualifying event’. Most simply this is a withdrawal from the partnership of money or money’s worth which does not represent income profit by the transferor of the chargeable interest or someone connected with him. However, ‘qualifying event’ also covers a reduction in partnership interest or cessation as a partner and, most curiously, the repayment by the partnership of a loan made by the transferor to the partnership. One needs therefore to be very careful following the transfer of land to a partnership in identifying what takes place in the following three years, starting with the identification of who has transferred what into the partnership and who is connected with whom.
Transfer of partnership interest pursuant to earlier arrangements
Adrian Shipwright warned also of the wide scope of para 17 of FA 2003 Sch 15, even if not always taken by HMRC Stamp Taxes, it appears.
Consider a farming partnership between Dad, Mum and their two sons. Under the agreement there are options in favour of surviving partners to buy the partnership shares of deceased partners, which is in place before anything else happens. Subsequently: in 2007 Dad transfers a property to the partnership (as a para 10(1)(a) transaction). Three years later in 2010, Dad dies (with a Will) and in the following year the two sons exercise their option and acquire Dad’s share from his executors. The question is: why does para 17 not bite?
The argument that it does is that the Will is an arrangement in place before the transfer. And the death occurs before the transfer even if the death is the effective date of the Will.
If there is a transfer (as Adrian believes there is), who makes the transfer? He thinks the answer is not the executors, on the grounds that death disconnects otherwise connected individuals under TA 1988, s 839. The problem then is who does make the transfer? The second question is whether the survivor’s option provisions in the partnership agreement are ‘arrangements that were in place at the time of the land transfer’ under para 17(1)(e)? Here the answer is yes because of para 14 of Sch 15, with the usual wide definition of ‘arrangements’.
Suppose the partners make a new partnership agreement in 2008 that which also replicates the survivor option provisions, could new ss75A, B and C apply? Might the arrangements be different if, say, there are no survivors’ options and Dad’s partnership share passes under his Will made in 2005 to Mum? Does the wide definition of ‘arrangement’ in para 14 make the 2005 Will an arrangement in place at the time of the transfer? If not, consider what if Dad makes a new Will in 2009 revoking the 2005 Will but still leaving his partnership share to Mum? Is the 2009 Will an arrangement in place at the time of the transfer and what would the impact be of ss75A, B and C?
Michael Thomas noted that these had been heavily marketed for individuals and had also been used by some companies. The fundamental question is whether they worked on general principles or whether the consideration given by the connected first party is charged under FA 2003, s 45(3). Michael thought that the scheme was not effective, even under the husband and wife variant where the husband agreed to purchase for 100 and the wife paid 10. The best argument that the scheme worked was that a double charge would arise if full consideration were given by the sub-purchaser.
HMRC’s guidance says that the sub-sale scheme is caught by FA 2003, s 75A and Michael Thomas fully expects them to challenge such schemes. Even if the original vendor is in the dark the sub-sale would happen ‘in connection with’ the first transaction because this is an objective test. And s 45(3) does not disregard the sub-sale for s75A purposes given the express reference in s 75A(2).
What planning survives? SDLT and incorporations
It is quite clear that there is a market value charge under FA 2003 s53 if an individual transfers his land-owning business to a wholly-owned company, even if there is CGT hold-over relief under TCGA 1992, s 162. By contrast, there is no market value charge if a partnership of individuals transfers land to a company connected with them: HMRC accept that the partnerships code ‘trumps’ s 53. However, Michael Thomas warned that s 75A would catch you if a partnership was expressly formed to receive the land prior to incorporation, but not if there was a pre-existing partnership business. He noted that there was a market value charge where land was transferred by a partnership of companies to an individual but not the other way round.
SDLT planning for developers
Michael Thomas suggested two ideas which work. First, with building licences, the developer D acquires no interest in the land (other than as security) and is paid by reference to the sale proceeds in his capacity as builder and marketing agent. As long as D cannot direct to whom the conveyances go (which may be a practical problem), FA 2003, s 44A should not apply.
Second, consider a joint venture where V the vendor retains the land and D the developer acquires a right to share in sale proceeds in return for works (and claims the building works exemption). There is no SDLT charge on the value of the works.
Notifiable transactions: FB 2008 exemptions
Andrew Campbell wondered why new s 77A inserted by FB 2008 into FA 2003 exempted from notification only major interest transactions exempt under FA Sch 3. Consider the following Example.
Husband and wife going through a divorce grant options to acquire specified property from each other for a consideration. While exempt from SDLT, the transactions are still notifiable.
FA 2003, s43(3) provides that ‘the variation of a chargeable interest (other than a lease) is –
- an acquisition … by the person benefitting from the variation; and
- a disposal … by the person whose interest is subject to or limited by the variation.’
Andrew Campbell offered the following examples:
Seller and buyer contract for a freehold sale for completion on 29 September 2008. There is not substantial performance. Later they agree a price increase of £250,000 and to delay completion until 29 September 2009. The question is whether the consideration is paid for a chargeable variation. The answer is presumably yes if the money is paid when the contract is varied, but no if it is paid on completion. If the answer is yes, the variation and the transfer are linked transactions under s108 and if it is a chargeable variation the purchaser for SDLT purposes is the buyer.
Seller and buyer exchange contracts to sell freehold land for £3 million, with no specific performance. Later, but before completion, they agree to reduce the price by £250,000 and that the transfer will reserve a right of way in favour of the seller’s retained land. Does it matter when the consideration is paid? If it is a chargeable variation the purchaser for SDLT purposes is the seller and there are two different taxpayers. Compare the positions if:
- the contract is drafted correctly when exchanged; and
- a right of way is granted separately by buyer after completion.
The moral of the story is make sure you get it right before you exchange.
Tearing up a contract is a land transaction which is not exempt under s 44. The vendor acquires the purchaser’s equity. The question is; what consideration passes from the vendor? According to Andrew Campbell this point often arises where the purchaser’s mortgage offer expires before completion is due and he cannot get another. Keen to remarket, the vendor may agree to release the purchaser from his potential future liability provided the purchaser sacrifices the deposit. It is arguable that the vendor has given consideration by discharging the purchaser’s contingent liability to pay damages. Of course, the actual (former) liability is unquantifiable unless and until the property is re-sold and the vendor’s loss if any becomes certain.
(Article by Matthew Hutton in Indirect Tax Voice July 2008 pp3 – 6)
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