PIM1224 - Other sums treated like premiums: charge on sale of property with right to re-conveyance

Summary

A charge to tax may arise when, instead of a lease being granted:

• the owner of a property (including the owner of a leasehold) sells their interest in it, and
• there is a condition that they may buy it back later.

Without special rules, a landlord could avoid tax by selling a property to a ‘tenant’ with the right to buy it back later instead of granting a lease for a premium. The vendor is effectively taxed as if they had received a premium equal to the difference between the sale price and the price for the re-purchase. The sale of property with a right to lease back is dealt with at PIM1226.

The legislation is in ICTA88/S36 (1) and (2) and ITTOIA05/S284.

The provisions apply to the sale of 'an estate or interest in land' - this may include either a freehold or a leasehold interest.

For ICTA88/S36 or ITTOIA05/S284 to apply, the sale must have been subject to a provision that the land shall be, or may be required to be, re-conveyed at a future date to the vendor or to 'a person connected with him'. The meaning of 'connected person' in ICTA88/S839 applies.

If the re-purchase is less than two years after the sale, the amount chargeable is the difference between the sale price and the price at which it is to be re-conveyed.

If the re-purchase is two years or more after the sale, the amount chargeable is reduced by one-fiftieth for each complete year after the first in the period between the sale and the re- purchase.

What is the date of sale?

ICTA88/S36 (4B) and ITTOIA05/S286 (6) provide that an estate or interest in land is treated as sold when any of the following occurs:

• an unconditional contract for its sale is entered into, or
• a conditional contract for its sale becomes unconditional, or
• an option or right of pre-emption is exercised requiring the vendor to enter into an unconditional contract.

How the amount chargeable is taxed

The amount chargeable is treated as income of the vendor's rental business at the time of the original sale. If he already has a rental business it is treated as part of the same business, unless it is in a different capacity such as trustee, personal representative, partner etc (see PIM1020).

Date of re-conveyance not fixed, price may vary with date

If the date of re-conveyance is not fixed, the date to be used is the earliest date that the property could be re-conveyed under the terms of the sale. If the price for re-conveyance varies according to the date, then the price to be used in the computation is the lowest possible under the terms of the sale. If in fact the re-conveyance takes place at a different price or not at the earliest possible date, the taxpayer may make a repayment claim within six years of the re-conveyance. The amount repayable is the difference between the liability assessed under ICTA88/S36 or ITTOIA05/S284 and the amount that would have been assessed if the actual date had been used as if it were a fixed date.

Example

On 6 April 2004 Una completes the sale of a factory to Violet for £400,000. The sale agreement provides that Una may exercise an option to repurchase the factory for 250,000 at any time after 30 June 2009. As five years must elapse before the earliest date for re- conveyance, Una is chargeable on £138,000 for 2004-05, calculated like this:

ITTOIA05 change

ITTOIA05/S284 provides that the chargeable amount of the deemed premium is to be computed in the same way as the chargeable amount of a normal premium. That means that there is no charge if the period between sale and re-purchase is more than 50 years. Where the period is 50 years or less the computations in ICTA88/S36 and ITTOIA05/S284 give the same result.