Download The Notional Land Transaction

KEY ISSUES IN SDLT – MICHAEL THOMAS
Overview
SDLT is fast maturing as a tax. Future finance acts are likely to contain less tinkering
with the main charging provisions and reliefs; although undoubtedly there will be
some of that.
Some major practical problems remain. One is the complexity of the land transaction
returns and the difficulties encountered with HMRC in processing them, but that is
outside the scope of this talk. Another is the problem of HMRC not making available
to taxpayers the views which it has taken on the legislation. More generally, there is a
real danger of a “two-tier tax” where a small number of advisers debate minutiae
whilst in other cases issues are not addressed. The worst example of all this is the
SDLT partnerships regime where the complexity is totally disproportionate to the tax
at stake.
Section 75A FA 2003: the Death of SDLT Planning?
Introduction
Section 75A, the new general anti-avoidance rule for SDLT, was first introduced by
the SDLT (Variation of the FA 2003) Regulations 2006 (SI No. 3237) with effect
from 6 December 2006. A slightly revised version (which will have retrospective
effect to 6 December 2006) is being enacted as clause 70 of the 2007 Finance Bill and
it is that version which forms the basis of this note.
The striking feature of s.75A is that it is very widely drafted. It is therefore a very
effective weapon available to HM Revenue at Customs (“HMRC”) and, is likely to
succeed in countering the SDLT planning arrangements against which it is designed
to be used if it is deployed before the courts. To a large extent it is thought that s.75A
will indeed mark the end of SDLT “schemes”. The introduction of s.75A will
accelerate the trend towards bespoke planning which is of more limited application.
The potential width of situations in which s.75A might apply gives cause for concern
that it may catch innocent transactions. However, it is thought that difficulties should
not arise provided that both HMRC and the courts give s.75A a sensible
interpretation.
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Conditions for s.75A to apply1
Introduction
Section 75A adopts the approach of “following the land”. It applies where a vendor
(“V”) disposes of a chargeable interest (i.e. land) and a purchaser (“P”) acquires either
that interest or an interest deriving from it. A number of transactions must be
“involved in connection with the disposal and acquisition”; these are referred to as
“the scheme transactions”. The final condition for s.75A to apply is that the total
SDLT payable in respect of the scheme transactions must be less than “the amount
that would be payable on a notional land transaction” under which P acquires V’s
chargeable interest. The conditions for s.75A to apply will now be considered in
more detail.
What is a scheme transaction?
Section 75A (2) and (3) contain further details on the kind of “scheme transactions” at
which s.75A is aimed. “Transaction” expressly includes “a non-land transaction”,
“an agreement, offer or undertaking not to take specified action”, “any kind of
arrangement whether or not it could otherwise be described as a transaction” and “a
transaction which takes place after the acquisition by P of the chargeable interest”.2
Although the term “transaction” is not expressly defined it is apparent that it is to be
construed very broadly and that s.75A(2) is designed to achieve this. An example of a
non-land transaction is the sale of shares in a company which owns the relevant land.
A list of six examples of scheme transactions is provided in s.75A(3). The purpose of
this is to ensure that both taxpayers and the courts are in no doubt that Parliament has
stopped certain schemes in accordance with HMRC’s recommendations. Two of the
examples given are a sub-sale and the carving out of a lease from a freehold. The
remaining examples all relate to the right to terminate a lease and comprise the grant
of such a right to terminate (whether as part of a new lease or by the variation of an
existing lease), the exercise of such a right and an agreement not to exercise a right to
terminate a lease or to take some other action.
“In Connection With”
The scheme transactions must take place “in connection” with both the disposal and
the acquisition. The interpretation of this phrase is crucial to the scope of s.75A. The
statute does not qualify the term “in connection with” and this suggests that it is
intended to have the broad interpretation for which HMRC would no doubt contend.
However, there are problems with having a concept which is so potentially broad at
the heart of s.75A. One is that innocent transactions, where there is no question of the
1
2
See s.75A(1)
See s.75A (2) (a) to (d)
2
taxpayer trying to avoid SDLT, are potentially caught. It is suggested that if this issue
does ever come to court then a sensible interpretation will be given to s.75A to ensure
that it only catches the kind of “schemes” at which it is clearly aimed. At least, that is
what should happen but there are no guarantees in litigation. The result is needless
uncertainty, which is the second problem.
Uncertainty wastes the resources of taxpayers, whose advisers will have to consider
the risk that s.75A might apply. Moreover, the uncertainty works against HMRC
because it encourages those who design schemes to save SDLT to speculate what
limits the courts might set on the relevant connection and to try and circumvent s.75A
using that limitation. This is of course inherently a very dangerous exercise because
when confronted with aggressive planning intended to circumvent a mini general antiavoidance rule the likelihood is that the courts will find that no such limitation exists.
However, if there are no other downsides to adopting the planning, then there may be
taxpayers who are prepared to take the risk and make HMRC fight and win the point.
For example, it might be argued that the relevant connection is lacking if the vendor is
unaware of the scheme transactions which are to follow, such as where the first step
involves a “double completion sub-sale”. The problem for any taxpayer seeking to
argue this is that there is nothing in s.75A to require all the parties to have a subjective
intention for the scheme transactions to take place. All that is required is for the
scheme transactions, looked at objectively, to take place in connection with one
another. In practice the result is to a large extent a matter of impression: if a court
finds the transactions to be the kind of planning which should be struck down then it
is likely to find the requisite connection and if it regards the transactions as innocent
then the opposite will follow.
It is much more strongly arguable that the requisite connection is lacking is if the
scheme transactions are undertaken by the vendor before any purchaser arrives on the
scene. SDLT is a purchaser-orientated tax and if the steps taken to save tax do not
involve him, especially if there is a long gap before his involvement, then s.75A
should not apply as the requisite connection will be lacking. To take a simple
example, if V creates a special purpose vehicle company in advance of marketing that
company and in the future the company is then marketed and ultimately acquired by P
then s.75A should not apply. Indeed this appears to be expressly accepted by
s.75C(1). Of course, creating an SPV is difficult owing to the anti-avoidance
legislation aimed at preventing this. However, there are situations where it is
possible, such as where other assets are transferred out of a company which also owns
land in order to create an SPV3 or if land is transferred to an unconnected company.
The Notional Land Transaction
The notional land transaction fulfils two functions. First, it forms a key part of the
test to determine whether or not s.75A applies. Secondly, if s.75A does apply then
the charge is computed by reference to it as discussed further below. As mentioned
3
It might be argued that the stripping out of the other assets from the SPV does not qualify as a scheme
transaction because it takes place before any land is disposed of. In any event, the present issue is
when s.75A might apply.
3
above, the notional transaction involves the acquisition of V’s chargeable interest by
P. The consideration under the notional transactions is the larger of the aggregate
amounts either given by way of consideration by any one person for the scheme
transactions or received by V or a person connected with him. Scheme transactions
which are also land transactions are disregarded for the purposes of SDLT. The
chargeable consideration on the notional transaction includes deemed chargeable
consideration arising under s.53 FA 2003, the SDLT partnerships regime and the rules
on exchanges.4
The Effect of Section 75A Applying
When section 75A applies, then two consequences result. First, any scheme
transactions which are also land transactions are disregarded for SDLT purposes.
Secondly, tax is then charged on P by reference to the notional transaction, the
effective date of which is the earlier of the last date of completion for the scheme
transactions or the last date on which a contract in respect of the scheme transactions
is substantially performed. The result is a kind of statutory Furniss v Dawson where
inserted steps are disregarded and tax is charged according to the end result.
However, on closer inspection, s.75A is almost certainly wider than Furniss, for
example because of the width of the term “in connection with”.
Exceptions to Section 75A
The revised statutory wording in the Finance Bill provides for several circumstances
when s.75A will not apply. However, what is most striking is the absence of any
statutory motive test or clearance procedure for transactions which do not have tax
avoidance as one of their main purposes. The author’s view, as stated above, is that
the courts will interpret s.75A to achieve this result but uncertainty still remains.
HMRC are similarly of the view that s.75A exists to prevent abusive avoidance but of
course that is no comfort when a taxpayer and HMRC disagree as to what is abusive.
The statutory exceptions to s.75A will now be dealt with in turn.
First, s.75A does not apply where the SDLT payable in respect of the scheme
transactions exceeds that payable on the actual transactions only by reason of either
the reliefs for alternative financing arrangements under ss71A to 73 or the social
housing provisions contained in Schedule 9. This exception applies where tax is
reduced “only” by the relevant provisions. Accordingly, it is not possible to have, for
example, a prior sub-sale combined with an alternative finance relief provision as a
basis for planning and then claim that s.75A does not apply.
Secondly, in calculating the chargeable consideration on the notional transaction the
consideration for what would otherwise be a scheme transaction is ignored if it is
4
See s.75C(5) and (7)
4
“merely incidental” to the transfer of the land from V to P under s.75B(1). It is
doubtful whether s.75B really adds anything because if a transaction is “merely
incidental” to the land transfer, then it is highly arguable that it lacks the relevant
connection with it in any event. Moreover, it is expressly provided5 that a transaction
is not incidental if it “forms part of a process, or series of transactions, by which the
transfer is effected”, “the transfer of the chargeable interest is conditional on the
completion of the transaction” or if it is of one of the specific scheme transactions
listed in s.75A(3). So, it is difficult to imagine scenarios where the exception for
incidental transactions will make a difference in practice. Nevertheless, it is provided
that a transaction may be incidental if it is undertaken only for a purpose relating to
the construction of a building, the sale or supply of something other than land or a
loan to P to enable him to acquire the property6. As stated above, these kind of
transactions lack the relevant connection with the land transfers in any event.
Thirdly, a transfer of shares is ignored for the purposes of s.75A if it would otherwise
be the first in a series of scheme transactions7. This ensures that a straightforward
sale of a land owning company followed by a liquidation is not caught by s.75A;
although it is doubtful whether it would have been caught in any event.
Fourthly, the notional transaction under s.75A attracts any “relief” as if it were an
actual transaction. The term relief is not defined so that there may be some
uncertainty as to what is a relief: for example strictly this would not cover any
exemption within Schedule 3. More fundamentally, this does not assist in the
situation where there is a series of innocent transactions, each eligible for individual
reliefs for which the notional transaction would not qualify. For example, land might
be transferred up to a Newco with group relief claimed prior to a liquidation
reconstruction on which reconstruction relief is claimed. This arrangement cannot be
intended to be caught by s.75A but the notional transaction would qualify for neither
relief. An attempt seems to have been made to address this very point in s.75C(3) but
it does not solve the problem because it merely provides that the notional transaction
satisfies the statutory purpose test if any of the scheme transactions do. This
provision needs amending and this may happen during the passing of the Finance Act.
Fifthly, no account is taken of any consideration paid in respect of certain transactions
which qualify for specified reliefs8. This means that even if the notional transaction
does not of itself qualify for relief, then some or all of the consideration may not be
chargeable.
Finally, on a practical note, HMRC has issued a so-called “White List” on
transactions which will not be caught by s.75A. The examples given are clearly
outside s.75A in any event, so the White List has little practical use. However, it is
worth noting that Prudential planning involving separate sale and build contracts is
expressly not caught.
5
By s.75B(2)
See s.75B(4)
7
See s.75 C (1)
8
See s.75C (4)
6
5
What is Caught by s.75A?
As stated at the outset, s.75A is a widely drafted mini general anti-avoidance rule. It
catches several planning arrangements which were popular prior to December 2006.
These include the more aggressive planning based on sub-sale relief under s.45(3)
designed to ensure that little or no tax was paid when there was no genuine
commercial sub-sale, the various ideas based on terminating a lease to radically alter
its value without an SDLT charge and the idea of the purchaser paying if the vendor
failed to exercise some right, such as the right to terminate a lease. Schemes
involving partnerships are also caught although the flaws in the legislation on which
the planning was typically based are dealt with in their own right, as discussed further
below. Nevertheless, s.75A prevents individual vendors from using partnerships to
avoid SDLT being payable on a sale.
Are Innocent Transactions Caught?
The short answer to this is that innocent transactions should not be caught. However,
the position is not as clear as it could be owning to the width of the scope of s.75A.
The result is that there is some uncertainty. However, in the author’s view very often
it will not be too difficult to form a firm view that s.75A does not apply when there is
no question of any planning.
What Planning Survives s.75A?
Perhaps the biggest question in practice is what planning survives s.75A.
possible to identify various arrangements which clearly do.
It is
One is a Prudential arrangement where the purchaser acquires bare land from a
vendor and at the same time enters into a building contract with the vendor so that
SDLT is payable on the land value alone.
Another is a sale of shares in a land owning company or units in a unit trust. Creating
a special purpose vehicle for sale is a more difficult exercise of course. Prospective
corporate vendors should consider creating SPVs more than three years in advance of
any prospective sale to avoid any clawback of relief. SPVs can also be created by
hiving out other assets to create a clean company where the other factors permit this.
A third kind of arrangement which should be immune from s.75A is for a developer to
not acquire any interest in land but instead to be paid as a builder and also as
marketing agent for the landowner-vendor. Section 75A has nothing to bite on
provided that the developer does not acquire any interest in land. The key to ensuring
the success of this kind of arrangement is to ensure that the developer does not
acquire any interest in land whilst balancing this against the commerciality of the deal
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and the vendor’s needs. These kind of arrangements might well become very popular
over the next few months.
A fourth group of arrangements comprise what might be termed “bespoke planning”.
In some transactions there will be particular facts which mean that the SDLT charge
can be reduced without the need for a contrived arrangement. Put another way, if
there is no series of transactions, then s.75A cannot apply. One example of this is for
a tenant to swap a 999 year lease for a new lease rather than a freehold to take
advantage of the rules on surrenders and regrants. Another is the rule that no SDLT is
chargeable on the incorporation of a partnership, as discussed further below.
Finally, there may be scope for more aggressive arrangements. However, the most
likely key to achieving this is to break the “connection” test. It is considered that
there will be good arguments that the connection test is broken if the vendor sets up
the planning prior to the purchaser arriving on the scene. The longer the time gap
between the setting up of an arrangement and an ultimate sale, the harder it is to argue
that the requisite connection is present. The Furniss v Dawson case law is relevant in
this regard. If no consideration passes at the first stage then there is nothing for s.75A
to bite on at that time. However, if there is to be a significant time gap, it must be
recognised that in many cases it may not be worth all the effort, risk and commercial
inconvenience in order to save SDLT at 4% and it might be simpler to create an SPV
and wait 3 years. There may be scope for other arrangements which exploit the s.75A
rules for the basis of planning, such as by taking advantage of the rules on deemed
consideration to achieve an SDLT saving.
Is s.75A the end of SDLT schemes of general application?
HMRC’s hope is clearly that s.75A will mark the end of “one size fits all” SDLT
planning schemes. To consider whether this is likely to be the case it is necessary to
understand HMRC’s approach to SDLT planning. HMRC has up to now been slow to
attack SDLT planning arrangements through the courts. Instead the approach has
been to amend the legislation. Not all of the legislative amendments have been
unqualified successes as more than one has failed to stop the intended target and
others have been unnecessary and only caused further confusion. It is also important
to understand that not every arrangement which s.75A targets necessarily worked
anyway. HMRC would have had strong arguments against more than one of the
schemes against which s.75A is targeted. Who would have prevailed before the
courts is inherently uncertain but it is very unlikely that HMRC would have failed in
every challenge.
Conversely, HMRC’s failure to challenge SDLT schemes encourages taxpayers who
wish to adopt them. If HMRC accepts that a scheme works then that is its result. If
no other tax apart from SDLT is at stake then more aggressive taxpayers may be
prepared to undertake planning on the basis that little will have been lost if it fails.
Any statutory provision is open to interpretation and by using such broad charging
concepts s.75A lends itself to possible interpretations which radically restrict its
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scope. In short, if HMRC wants to stop the next round of SDLT schemes, then it is
likely that it will need to actually use s.75A. The author’s view is that s.75A will
indeed be used, in particular because there is no basis for HMRC to ask Parliament for
anything wider!
So, whilst it may not be impossible to plan aggressively around s.75A that exercise
will be both very difficult and very high risk. Before any arrangement is adopted then
those risks will need to be spelt out in full to any client. Almost certainly full details
will need to be disclosed to HMRC to prevent disclosure assessments, penalties and
any accusations of impropriety. Expert advice will need to be taken in individual
issues.
Conclusions
Section 75A is a widely drafted and very powerful mini-general anti-avoidance rule.
Provided that HMRC actually uses it, then it is likely to spell the end of most if not all
“one size fits all” SDLT schemes. The future of SDLT planning is will be towards
bespoke ideas and planning of which HMRC approves. When undertaking it should
not be overlooked that aside from s.75A it needs to work as a matter of the general
SDLT code, not fall foul of Ramsay and fit with both other taxes and the commercial
deal.
Other SDLT Changes in Finance Act 2007
Changes to Partnerships Regime
Various amendments are made to the SDLT partnerships regime. These remove
certain anomalies that were available to be exploited for planning purposes. The
changes were originally made in the regulations accompanying the 2006 Pre Budget
Report with immediate effect and are being re-enacted again with minor changes, as
part of FA 2007.
Probably the most important change is that the rules on calculating the sum of the
lower proportions in para 12 Sch 15 are amended so that an effective transfer of land
to a connected company when that land is transferred to a partnership is chargeable at
market value. A new group relief is available, although of course this does not assist
companies in common ownership and it is subject to a clawback mechanism. This
prevents land being transferred into a partnership consisting mainly of connected
companies the shares in which could then be sold. The old anti-avoidance rule
contained in para 13 which applied where land was transferred to a partnership
consisting wholly of companies is now repealed.
Para 14 is now amended so that the transfer of an income share in a property
investment (or land dealing) partnership is chargeable even if no consideration is
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given. After the passing of FA 2007, this will apply even if the transferee is an
individual. Group relief is potentially available where the transferee is a company but
there is also a charge to ensure that this can be clawed back.
The rules on transferring property out of a partnership to a partner or person
connected with a partner are also amended. The change is to the calculation of the
SLP under para 20 and is broadly designed to mirror that under para 12. However,
the result is that the share of partners connected to the transferee is taken account of
only if those partners are individuals or the company holds the land as trustee. So, if a
partnership of connected companies transfers land to one of the partners then a market
value charge arises. However, if a partnership of individuals transfers land to a
company which they together control then no SDLT charge arises. An opportunity
for planning therefore arises here.
Finally, paragraph 36, which it will be recalled sets out when there is a transfer of an
interest in a partnership on which the para 14 charge bites, is radically amended. It is
now provided that whenever “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)”. A “partnership share” is the partner’s right to share in the partnership
income at the relevant time: see para 34(2). So, it appears that wherever income
shares in a partnership vary then an SDLT charge will arise. This does not apply to
trading partnerships as they are excluded from the para 14 charge, which is probably
the rationale for the change. In other words, now that trading and professional
partnerships are excluded from the para 14 charge the thinking seems to be that there
is no need for the complications that were formerly contained in para 36.
Other Changes in FA 20079
For the purposes of SDLT reconstruction relief if either the target or the acquiring
company holds any of its own shares prior to the acquisition these are treated as
cancelled and effectively disregarded for the purposes of the “mirror image”
shareholding test. See clause 73(3) FB 2007.
The definition of “exempt interest” is extended to include the lender’s interest under
an alternative finance arrangement so that there is equality of treatment with a
lender’s interest under a conventional mortgage. See further Cl 74 of FB 2007
introducing the new s.73B.
The rules on exchanges are modified so that exchanges between connected persons
are no longer linked transactions. See Cl 75.
The social housing reliefs are extended to give equivalent treatment to that currently
given to shared ownership leases to shared ownership trusts created using
9
All of which have effect from Royal Assent of FA 2007.
9
commonhold. There is also a minor amendment to the treatment of shared ownership
leases. See Cls 76 and 77 FB 2007.
For transfers of school land between educational bodies, the relief in the schools’
legislation is abolished and in future SDLT relief will need to be claimed under s.66
FA 2003 (Transfers involving public bodies).
Finally, provision is made to enable the government to make regulations granting
relief on the purchase of carbon zero homes. The relief will not have effect before 1
October 2012.
SDLT and Goodwill
On a business sale, SDLT is payable on the price properly allocated to the land: see
para 4 Sch 4 FA 2003. HMRC is arguing that on a business sale “goodwill” should be
attributed to the land. In HMRC’s terms, “inherent goodwill” is the inherent
suitability of land as a business location. “Adherent goodwill” is the goodwill which
is built up though the operation of a business at particular premises. That the land
valuation must take account of both of these is probably right. However, HMRC goes
further and argues that on a businesses sale there is no “personal goodwill” in the
sense of the value of the business in excess of the value of its assets. This argument is
made notwithstanding the existence of restrictive covenants on the vendors, which is
indicative of personal goodwill and the fact that the price attributed to “goodwill”
frequently does include assets of the business, such as the intellectual property rights.
The correct analysis depends on the individual facts. However, it is suggested that
HMRC’s claims as to the extent to which goodwill enhances land value may be
frequently be extravagant and that such claims should be resisted.
Linked Transactions
Transactions are linked under s.108 FA 2003 where they term part of a single
“scheme arrangement or series of transactions” between the same parties (or
connected persons). Where this rule applies then the transactions are aggregated for
the purposes of determining the rate of tax. There is uncertainty as to when
transactions will be linked. AG v Cohen [1937] 1 KB 478 remains the sole authority.
One situation where the linked transactions rule is in issue is where a residential
developer sells multiple units to a single purchaser. It is suggested that the correct test
is to ask whether the relevant transaction would have been entered into irrespective of
the parties entering into any other transaction(s). So, if the price is discounted
dependent upon the purchaser buying other units then the transactions will be linked.
On the other hand, transactions entered into on the same day will not be linked
provided that each would have been entered into irrespective of the parties entering
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into any other transactions. That said, where there is a risk of a challenge from
HMRC suitable confirmation from the parties should be obtained prior to the
transaction.
Sub-Sales and Assignments
Sub-sales and assignments are of course dealt with together under s.45 FA 2003. A
discussion of the basic rules on sub-sales is beyond the scope of this Note.
One point to note, which is now common knowledge, is that HMRC accepts “double
completion sub-sales” whereby the sub-sale is completed immediately following
completion of the original agreement. The completions must take place “at the same
time” and HMRC interprets this strictly in terms of seconds or minutes and not within
hours or on the same day. Double completion sub-sales are useful where the original
purchaser wants secrecy or where the vendor refuses to sub-sell.
Sub-sale planning is primarily available to those who can sell without taking
possession. Most obviously, this would apply to a land speculator but sub-sale relief
may be available to developers, on a sale to an affordable housing provider or perhaps
combined with Prudential when the developer sub-sells on to a fund, and to anyone
who acquires excess land which they will not keep.
Sub-sale relief is also used as the basis for planning. The problem is that the original
purchaser (“A”) and the sub-purchaser (“B”) will typically be connected and s.45(3)
charges the consideration given by A as part of the consideration given by B. That
said, the statute is not well drafted and it is possible to argue that if B is chargeable on
the consideration given by A then a double charge arises where B also pays for the
assignment.
The better view is that no such double charge arises but nor is there a loophole.
Alternatively, if the planning is challenged and the court rejects this view, it is likely
that it will prefer the double charge to the loophole. That said, it is certainly arguable
that the double charge argument would convince a court that there is a loophole here.
It is therefore considered that this kind of sub-sale planning can properly be attempted
but clients should be aware of the risk of challenge.
SDLT and Developments
Introduction
The general rule that a developer will pay stamp duty land tax (“SDLT”) on the
purchase price which it pays to acquire a site at the rate of 4% is simply stated.
However, in practice the SDLT consequences of a development are frequently much
11
less straightforward. The purpose of this part of the presentation is to explore how
SDLT applies to development transactions with particular emphasis on areas of
potential difficulty. Although SDLT is primarily a concern for developers there are
situations in which an unwitting vendor might incur a tax charge. Finally, I will try
and identify ways in which the charge to SDLT might be minimised.
The Wide Scope of the Charge to SDLT
The starting point is that SDLT is a tax on “land transactions”. A land transaction
means the “acquisition” of a “chargeable interest”: see s.43(1) FA 2003. Chargeable
interest is defined in s.48(1) FA 2003 as follows:
(a)
an estate, interest, right or power in or over land in the
UK; or
(b)
the benefit of an obligation, restriction or condition
affecting the value of any such estate, interest, right or
power.
The charge to SDLT is intended to be as wide as possible. In my view, a right to be
able to direct a vendor to make conveyances of completed units to third party
purchasers falls within the definition of chargeable interest under section 48(1)(a).
Section 44A FA 2003 (inserted by FA 2004) confirms that a developer acquires a
chargeable interest when he acquires right to direct the vendor to make conveyances
either to third parties and/or to himself. However, s.44A is unnecessary because such
transactions are caught by the general charge in any event. Accordingly, a developer
cannot save SDLT by having the vendor make conveyances directly to third parties.
A second point to be wary of is that the right to share in the proceeds of sale is a
chargeable interest. In Cooper v. Critchley [1965] Ch.433 the Court of Appeal
decided that a right to share in the proceeds of sale is an interest in land for the
purposes of section 40 Law of Property Act 1925. In Andes Utkilens v. O/Y Louisa
Stevedoring [1985] STC 301 Goulding J decided that an agreement to sell premises
and divide the proceeds created a trust for sale on the basis that the contract was
specifically enforceable.
One practical consequence of this is that developers cannot save SDLT by acquiring a
right over the proceeds of sale (even if the transaction could be structured
commercially so that the developer had no actual right to require the vendor to make
conveyances to third parties). A second consequence is that charges may arise where
parties pool land in order to develop it under a joint venture, although cf. Jenkins v
Brown [1989] 1 WLR 663.
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Finally, a building licence is outside the scope of SDLT: see s.48(2). However, there
is no scope for saving SDLT by arguing that the developer pays money for a building
licence because the reality is that the developer is not paying for the building licence
but rather the opportunity to profit, one way or another, from the development.
(Consideration must be apportioned on a proper basis: see para.4 Sch.4 FA 2003). So
a building licence does not save SDLT unless the developer does not acquire a
chargeable interest, which would only arise where it is simply paid as a builder. (The
developer taking possession under a building licence will of course also trigger
substantial performance under section 44(5) (6).)
What is the Chargeable Consideration?
The starting point is that the developer pays tax on the consideration at the rate of (up
to) 4%. If the developer simply pays a fixed cash price then there is nothing further to
say. However, frequently the consideration will include one or more of the following:
(i)
overage payments;
(ii)
building works;
(iii)
a leaseback to the vendor of part of the property.
Each of the above types of consideration has special rules which apply to it. I will
deal with them in turn.
Overage Payments
Section 51 FA 2003 provides that where any consideration is contingent then the
chargeable consideration is calculated on the basis that the outcome of the
contingency is that the maximum amount is payable. If the consideration is uncertain
or unascertainable then a “reasonable estimate” is used.
First, it is useful to define terms:
(i)
Contingent consideration means consideration dependent
upon a future event eg., an additional payment of £5 million if
planning permission is granted.
(ii)
Uncertain consideration means its value depends on future
events. Sales overage as a percentage of profits of the future
development is a classic example of this.
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(iii)
Unascertained consideration means consideration which is
ascertainable but which has not yet been calculated (eg where
the consideration is dependent on last year’s profits for which
accounts have not yet been drawn up).
Typically, overage will be both uncertain and contingent. In that case the proper
approach is to determine its value according to a reasonable estimate on the basis that
it is uncertain. If the overage formula contains a cap this dos not override the need to
make a reasonable estimate (s.51 is not a re-enactment of the stamp duty “contingency
principle” under which either a maximum or a minimum figure might be taken as the
correct amount).
Having made a reasonable estimate as to the likely overage the developer has a
choice. Either it can pay the tax or apply to defer payment of the tax in accordance
with s.90 FA 2003 and Part 4 of the SDLT (Administration) Regulations 2003/2837.
An application must be made within 30 days, the same time as the land transaction
return must be delivered. The tenor of the Regulations is that deferral applications
will not normally be referred unless the deferral provisions are being exploited for tax
avoidance purposes. Deferral is only possible where at least part of the overage is or
may be payable 6 months after the effective date.
When the consideration becomes known because the overage is qualified then a
further return is required under the Regulations within 30 days together with the tax
payable: see Regulations 12 and 24. Time runs from when the amount is ascertained,
not when it is paid.
If the developer does not defer payment of the tax and the overage turns out not to be
payable then he may apply for a refund under s.80 FA 2003. Alternatively, if the
overage payable exceeds his original estimate then he must pay the additional tax,
again under s.80.
Building Works
Are the Building Works Consideration?
The first issue with building works is to determine whether or not they are
consideration for the purchase. Sometimes this is straightforward: for example, if a
developer agrees to build a new building to be occupied by the vendor this is
consideration. An interesting area is “infrastructure works”. Suppose that the
developer agrees to construct an access road to service both the completed dwellings
and the unit to be occupied by the vendor, is this consideration? The answer is that it
is consideration to the extent that it benefits the vendor and an apportionment
calculation must be made: see paragraph 4 Schedule 4 FA 2003. Where there is
overage payable the construction of the development itself is not consideration unless
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excessive overage representing more than the original land value is payable: cf CCE v
Latchmere Properties [2005] STC 731.
What is the Value of the Works as Consideration?
The value of the works is taken to be the amount that would have to be paid in the
open market to carry out the works: see paragraph 10(3)(b) Schedule 4. This amount
includes any VAT that would be chargeable on those works.
Is the Value of the Building Works Relieved under Paragraph 10 Schedule 4?
The value of the building works does not count as chargeable consideration under
paragraph 10 provided that:
(1)
the works are carried out after the effective date;
(2)
the works are carried out on land acquired under the transaction
or on other land held by the developer; and
(3)
the works are not carried out by the vendor or a connected
person.
In practice (2) is the most important condition. A particular issue which arises is
whether the building works exemption remains available when the works are to be
carried out on land which is to be leased back to the vendor, thereby triggering a
charge under the exchange provisions discussed in the next section below. The better
view is that the benefit of paragraph 10 does remain available but there is some
uncertainty here.
Finally, it is sometimes asked whether the building works exemption is affected by
Prudential v. IRC [1993] 1 WLR 211. The answer is that Prudential, discussed further
below, is something separate. However, where a separate build contract is used
market value must be paid for the bare land otherwise it might be said that the build
contract, with its exaggerated profit, is consideration for the land.
Transfer of Land to Vendor
Part of the consideration taking the form of land being transferred to the vendor
occurs most frequently in “mixed-use developments” where the vendor receives a
leaseback of a completed commercial unit. This has the effect of bringing the
exchange provisions into play with the result that each party is now taxed on the
market value of what it receives: see section 47 and paragraph 5 Schedule 4 FA 2003.
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This trumps all the other rules governing consideration. In practice, of course, as this
is an arm’s length deal the best evidence as to market value is what the developer
pays. HMRC accepts that the market value of the purchaser’s interest is reduced by
the value of any leaseback provided that the leaseback is agreed at the outset.
However, there are practical consequences. First, there is no ability to defer payment
in respect of overage because the overage no longer forms part or the chargeable
consideration. Secondly, however, it may be that the developer’s market value is less
than the total purchase price plus overage. HMRC may of course challenge any
market value. Thirdly, if the value of the building works effectively now counts as
chargeable consideration then the SDLT charge is increased. However, in my view
this is not the case and paragraph 10 continues to apply.
Advising Vendors – Avoiding Double Charges to Tax
SDLT is, of course, primarily payable by the developer. However, there are situations
where the vendor could also find itself chargeable to SDLT.
One is where a vendor takes a leaseback of a new commercial unit on a mixed use
development, as discussed in the previous paragraph. The vendor may be able to save
SDLT by granting a prior lease to a nominee, if that is possible, but note that the
developer will lose the benefit of the building works exemption in this event.
A second example where a “vendor” might be chargeable to SDLT is where joint
vendors pool land and agree to share the proceeds. The non-developer is arguably
chargeable to SDLT to the extent that he acquires rights to share in the proceeds of
sale of the developer’s land. The developer is very likely chargeable in respect of the
additional profit share which he acquires (and the building works exemption is not
available because it is building on the vendor’s land).
It might be thought that the retention of easements and covenants by a vendor is
outside the scope of SDLT. However, section 43(3)(a)suggests otherwise by
providing that the acquisition of a chargeable interest includes a creation. The better
view is that the retention of easements and covenants by a vendor is outside the hope
of SDLT and HMRC is known to accept this.
Timing of the Charge to SDLT
The general rule of course is now that SDLT is payable on the earlier of substantial
performance or completion. As regards substantial performance, the developer taking
possession of part of the site will not amount to substantial performance of the whole
(provided that only one conveyance is made of the whole). If completion takes place
in stages then each conveyance triggers a charge to SDLT because each completion is
a land transaction. Where completion is to take place in stages, payment of 90% of the
total purchase price will amount to substantial performance of every phase.
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SDLT Issues Concerning Choice of Development Vehicles and Joint Venture
Structures
Where developers acquire a site as co-owners then they are treated as joint purchasers
for SDLT purposes: see s.103 FA 2003. No additional charge arises. The analysis
remains the same if one developer acquires the land as bare trustee on behalf of
himself and the other joint venturers: see paragraph 3 Schedule 16 FA 2003. Where
land is partitioned following completion of the joint venture according to the interests
of the parties then no SDLT will be payable unless equality money is paid: see
especially paragraph 6 Schedule 4 FA 2003. On a partition note the need to be able to
claim group relief if land is transferred to a connected company to avoid a market
value charge under section 53 FA 2003.
It is important that a partnership is not created (or at least not inadvertently). The test
is the general law one of whether a business is being carried on in common with a
view to profit. If a partnership is created then charges may arise when land is
transferred to or from it by a partner under paragraphs 10, 13 and 18 Schedule 15 FA
2003. Even if there is a partnership no additional charge arises provided that land is
purchased by the partnership and is not subsequently partitioned between the partners.
More generally, where land is pooled by joint venturers then there is the risk of an
SDLT charge either under the partnerships regime or the general charge. Where
possible the better course is for joint venturers to acquire the land together.
Planning Agreement Issues
Transfers of land pursuant to section 106 agreements are specifically exempted under
s.61 FA 2003. The Inland Revenue also accepts that no charge arises in relation to
transfers of highways, apparently on the basis that there is no consideration for such a
transfer. This analysis is dubious because if there is no consideration in a grant of
planning, why is section 61 needed?
If a planning right is consideration (as s.61 assumes) then this raises the question of
whether a planning right is itself a chargeable interest so that the developer is
chargeable on any consideration given for it. Frequently, the developer will carry out
works on his own land (e.g. building a community centre) so that the benefit of the
building works exemption in para.10 Sch.4 is available. However, if the land is then
transferred to the local authority there is no exemption for the land element. HMRC’s
view is apparently that there is no consideration here on the basis that the developer
does not want to retain the land: the SDLT Manual para.22505. What about the
situation where the developer agrees to make a cash contribution? The answer here is
that a planning right is not a chargeable interest and HMRC takes this view.
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Minimising the Charge to SDLT for Developers
Introduction
There is no magic solution for developers to save SDLT. SDLT has largely been
designed to prevent tax planning. Particular difficulties for developers have been dealt
with above and I will not repeat them here. Moreover, however large the SDLT
charge is it is only ever 4% of the purchase price so there is a limited incentive to save
tax. Any SDLT saving must be assessed in the light of other taxes and the commercial
impact. This section is concerned with SDLT saving ideas specific to developers. A
developer might also consider any of the general planning ideas discussed later.
On the other hand, tax planning may also be “defensive” in the sense of saving
unnecessary charges rather than trying to avoid paying any tax at all. Saving SDLT
will, as with other taxes, become increasingly transaction-specific and it may be that
the facts of a particular transaction enable tax to be saved. Finally, saving SDLT is
something which vendors might also be giving thought to: the best way of saving
SDLT remains to sell shares in an SPV. I will deal with some specific topics relevant
to planning in turn.
Planning for Developers: Saving SDLT on Site Acquisitions
Unlike under stamp duty, it is hard for developers to save SDLT on site acquisitions.
It is not possible to rely on sub-sale relief because taking possession, even under
licence, amounts to substantial performance: see esp. s.44(6). A second problem is the
width of the definition of chargeable interest because most developers will want rights
over land (the right to compel a sale and to share in the proceeds) and will not be
content to be paid as builders. A third problem is the introduction of s.75A.
Joint Venture: Developer Acquires Undivided Share
One suggestion is for the developer and the landowner to enter into a joint venture
agreement whereby the developer acquires an undivided share in the land (say 60%)
in return for cash and agreeing to build the development. The developer is chargeable
to SDLT on the cash. However, the value of the building works is exempt
consideration under para.10 Sch.4 FA 2003. The developer and the landowner then
share the sale proceeds. There are difficulties with this approach. First, the landowner
will have to wait to receive most of the sale proceeds. Secondly, the landowner will
have income profits and so may be unwilling to agree to this if it wants capital
treatment.
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Developer Acts as Builder and Landowner’s Marketing Agent
Another suggestion is to have the developer paid for undertaking the development and
for marketing the properties without it acquiring any interest in the land. The
difficulty here is in ensuring that the developer does not acquire a chargeable interest
in land. If the developer has the right to direct the landowner to make conveyances to
third parties then this is the acquisition of a chargeable interest: see s.44A FA 2003. A
right to share in the proceeds of sale under a specifically enforceable contract for the
sale of land is also a chargeable interest: see Anders Utkilens v. O/Y Stevedoring
[1985] STC 301. Accordingly, the developer cannot be given the right to direct the
vendor to make conveyances and then to share in the sale proceeds. Again, this
arrangement will result in the landowner having trading profits. It also works much
better if the developer does not make a large up-front payment. A major advantage of
this arrangement is that it does not trigger s.75A and it is considered that it will be
popular over the next few months.
Options Planning
A third suggestion is that perhaps the developer buys an option to acquire the land for
its current market value for £1. It also enters into a lease in consideration of a small
amount of cash and it agreeing to build the development on the site. The developer
pays SDLT on the cash but not on the value of the works as these are exempt
consideration under para.10 Sch.4 FA 2003.
Third party purchasers of the units then buy completed units by acquiring the rights of
both the landowner and the developer in each unit. If the landowner refuses to sell
then the developer exercises its option, albeit that it must now pay SDLT.
Again, this arrangement will result in the landowner having income profits.
Sub-Sale Relief
Where land is sub-sold prior to substantial performance than no SDLT charge arises
by virtue of section 45(3) FA 2003 (or section 45A). Advantage may be taken of this
where a developer acquires a large site and then sub-sells part to another developer
(e.g. a social housing provider) prior to completion.
Part Exchange Relief
If a housebuilder acquires the former main residence of a purchaser of one of the new
units then no SDLT is chargeable on that transaction: see paragraph 1 Schedule 6A
FA 2003.
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Charities Relief
Housing associations are often charities and so relieved from tax under Schedule 8 FA
2003.
Sale of Shares in Company
The best way to save SDLT remains to sell shares in an SPV company which owns
the land. Stamp duty will be chargeable at the rate of 0.5% unless the company is
incorporated outside the UK and the documentation executed abroad. The government
promised to charge sales of land rich companies to SDLT but no charge has yet been
introduced. In practice, the major problem is the 3-year group relief clawback.
Separate Sale and Build Contracts
Prudential v IRC [1993] 1 WLR 211 remains good law for SDLT. Instead of agreeing
to buying a completed building in a new build situation the purchaser saves SDLT by
acquiring bare land and entering into a separate building contract with the developer.
SDLT is then limited to the land price. It does not matter that the contracts are
negotiated together and form part of a single commercial deal.
The key to Prudential is that the land sale must be completed irrespective of
completion of the works contract. So, default on the works contract cannot prevent
completion of or reverse the land sale. It does not matter that the performance of both
contracts might be dependent upon planning.
Ideally the land sale should be completed before the works commence. However, that
is not essential provided that the land sale will complete irrespective of the works.
Some Pitfalls
Finally flip-side of SDLT planning is to ensure that the taxpayer does not fall into
unexpected traps. Issues to beware of include the following.
First, the amendments to acquisition relief which mean that SDLT is now chargeable
at market value on the partition of an investment business which owns property. This
is a dangerous point because there is a CGT relief and until FA 2005 there was a
corresponding stamp duties relief.
Secondly, note that the market value rule applies wherever land is transferred to a
connected company (unless by a partnership) even though there is no intention to sell
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the shares to save SDLT.
incorporation of a business.
Again, contrast the CGT roll-over relief on the
Thirdly, on the assignment of a lease the assignee should ensure that no charge asks
under para. 11 Sch. 17A owing to group relief having been claimed on the grant of the
lease. The assignee will also take over the obligations under the SDLT compliance
regime. It will therefore need to obtain the appropriate records.
Fourthly, substantial performance accelerates the tax charge (and the compliance
obligations) even when there is no intention to avoid tax. A fit out will typically
trigger substantial performance.
Finally, beware anything to do with partnerships. The SDLT partnerships regime is a
terrible piece of legislation.
Note also that HMRC takes some strange
“interpretations” of Schedule 15. Some of these are favourable to taxpayers. Others,
such as that properly owned by one partner and used by the partnership, for example
under a Harrison-Broadley v Smith arrangement, is partnership property for SDLT
purposes, are not. A major practical difficulty is that frequently the professional time
required to advise properly on the application of the SDLT partnerships regime will
be totally disproportionate to the amount of tax at stake.
Michael Thomas
17 April 2007
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