Section 75A Finance Act 2003

S.75A Finance Act (FA) 2003 is an anti-avoidance provision that is intended to counter certain schemes which have the effect of reducing Stamp Duty Land Tax liability.

Commencement

S.75A has effect in respect of disposals and acquisitions, and all related scheme transactions, which take place after 2.00 pm. on 6 December 2006.

Overall approach

Section 75A is an anti-avoidance provision. HM Revenue & Customs (HMRC) therefore takes the view that it applies only where there is avoidance of tax. On that basis, HMRC will not seek to apply s.75A where it considers transactions have already been taxed appropriately.

Section 75A applies where:

  • One person ('V') disposes of a chargeable interest, and another person ('P') acquires, that interest, or a chargeable interest derived from it (s.75A (1) (a)).
  • A number of transactions ('scheme transactions'), including the disposal and acquisition, are involved in connection with the disposal and acquisition (s.75A (1) (b)).
  • The total Stamp Duty Land Tax payable in respect of all the scheme transactions is less than the amount that would be payable on a notional land transaction effecting the acquisition (s.75A (1) (c)).

All of the above must be read together.

Where it applies, the effect of S.75A is as follows:

  • The individual scheme transactions are disregarded for Stamp Duty Land Tax purposes.
  • There is instead a notional transaction effecting the acquisition of V’s chargeable interest (that is the chargeable interest which was the subject matter of the disposal by V) by P.
  • The chargeable consideration on the notional transaction is referred to as the ‘notional consideration’.
  • The effective date of the notional transaction is the last date of completion of the scheme transactions or, if earlier, the last date on which a contract in respect of the scheme transactions is substantially performed.

Scheme transactions

The term 'transaction' includes:

  • a transaction which is not a 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
  • a transaction which takes place after the acquisition by P of the chargeable interest

S.75A (3) gives some examples of what may be considered a scheme transaction:

  • the acquisition by P of a lease deriving from a freehold owned or formerly owned by V
  • a sub-sale to a third person
  • the grant of a lease to a third person subject to a right to terminate
  • the exercise of a right to terminate a lease or to take some other action
  • an agreement not to exercise a right to terminate a lease or to take some other action
  • the variation of a right to terminate a lease or to take some other action

This is not an exhaustive list of transactions to which s.75A applies.

Application of s.75A

There are three steps to consider when contemplating the application of s.75A:

  • firstly identify a disposal and the relevant person who is V
  • secondly identify an acquisition and the relevant person who is P
  • thirdly consider whether a number of transactions are 'involved in connection with' the disposal and acquisition

In a complex scenario this process may need to be repeated with different parties being identified as V and P, possibly with different results.

The meaning of the phrase ‘involved in connection with’ has not yet been tested in the courts and, therefore, the dictionary definition of ‘connection’ should be applied. In HMRC’s view to be 'involved in connection with' each other the disposal, acquisition and other related transactions would normally involve more than one transaction in sequence relating to the same property. For example, related transactions would be considered to be ‘in connection with’ a disposal and acquisition (‘the composite transaction’) if the intended outcome of the composite transaction cannot be achieved in the form envisaged without those transactions taking place.S.75A will apply whether or not V, P or their associates or advisers have had any involvement with, or knowledge of, each other.

Situations where HMRC accept that S.75A is unlikely to apply

In deciding whether s75A applies to a set of transactions, it is necessary to look at the arrangements as a whole rather than simply at each individual step in isolation. Even the transactions below could be part of a scheme that purports to mitigate Stamp Duty Land Tax. But in general HMRC accepts that, to the extent that the situations below genuinely stand alone, the transactions will be taxed appropriately under the normal Stamp Duty Land Tax rules and so s.75A will not be triggered.

  1. X, Y and Z are individuals who decide to establish a partnership to manage their investment portfolio. They transfer investment property and cash into that partnership at value. HMRC considers this to be a straightforward establishment of and transfer of property into a partnership.
  2. X, Y and Z are the partners of a partnership. The purpose of the partnership is to acquire and develop a large residential property into 6 flats. When the development is complete they disagree as to how to manage the completed development so the partnership is dissolved and the partnership property (the flats and any partnership monies) is divided among the partners. It is assumed here that the agreements and documents relating to creation of the partnership demonstrate that the intention was for the partnership to manage the property after development and that the dissolution of the partnership arises from an unforeseen disagreement. HMRC would not seek to apply s.75A to this situation as long as the general Stamp Duty Land Tax legislation has been applied to the creation and dissolution of the partnership.
  3. A property investment business is carried on by a company owned in equal shares by four family members. The company is to be sold to an unconnected third party. The four individuals establish a partnership to hold the properties that were held by the company but that aren’t included in the sale. There is a clear commercial reason for the properties to be transferred out of the company that is to be sold to the unconnected third party.
  4. A property lettings business is carried on by three individuals X, Y and Z through a partnership. X, Y and Z consider that, commercially, the best way to continue to carry on their business is through a company. They therefore decide to incorporate the business. X, Y and Z subscribe for shares in a new company in the same proportion as their respective partnership holdings. The properties are transferred to the company.
  5. X and Y are corporate partners in a joint property-letting venture. They are unconnected except through their shares in the partnership. The partnership owns one property. Y’s shareholders have accepted an offer from a third party, Z, to acquire all of its share capital. Z does not wish to continue to operate the business with X so the decision is taken to distribute the property to Y. There is a clear commercial reason for the transactions. The normal Stamp Duty Land Tax rules applied to the original acquisition of the property by the company.
  6. V sells land to X and at the same time X sells the land to P. P pays Stamp Duty Land Tax based on the full amount of consideration received by V.
  7. V sells land to X and at the same time X sells the land to P. P pays Stamp Duty Land Tax based on the full amount of consideration received by V. At a later date P sells the land to Y and Y pays the full amount of Stamp Duty Land Tax that arises from the consideration that P received.
  8. V sells two properties at arm's length to third party purchasers N1 and N2. Subsequently, and in transactions which are not connected in any way with the purchases by N1 and N2, P buys both properties at arm's length. It is assumed that there is no connection between the sale by V and the purchase by P.
  9. V grants a long lease to X. At a later stage, and in a transaction which is not connected in any way with the grant of the long lease, X assigns the lease to an unconnected third party P. P exercises a statutory right of enfranchisement. S.75A does not apply as regards to disposal by V and the acquisition by P because it is taxed appropriately under the normal Stamp Duty Land Tax rules.
  10. V grants an option to X to purchase land. Subsequently, and in a transaction which is not connected in any way with the grant of the option, X assigns the benefit of the option to an unconnected third party P. P exercises the option. There is no connection between the transactions.

Situations where HMRC considers that S75A applies

  1. V agrees to sell land to X, and X agrees to sell the same land to P which is a partnership where the partners are X and persons connected to him. At the same time as the completion of the V-X contract, the X–P contract completes, this acquisition is effected by means of a 'transfer of rights’. X argues that no Stamp Duty Land Tax is due as his contract is disregarded by s.45, whilst P argues that no Stamp Duty Land Tax is due per Schedule 15 of FA 2003 given its connection with X. Section 75A applies because HMRC considers that the conditions of s75A 1(a) – (c) are met and that the notional transaction V-P could have been achieved in a more straight forward manner that would not have satisfied s75A(1)(c); Stamp Duty Land Tax is due on the notional consideration which is the full amount of consideration received by V.
  2. V grants a 999-year lease to Nominee for no premium and a peppercorn rent. V assigns the freehold reversion to P for a nominal sum. P pays Nominee £x in consideration of Nominee's agreement to vary the lease by the insertion of a provision giving the landlord the right to terminate the lease for no payment. P exercises the right to terminate. Under s.75A, the notional transaction is the acquisition of the unencumbered freehold by P and the notional consideration chargeable is £x given by P to Nominee.
  3. V grants a 999-year lease to Nominee for no premium and a peppercorn rent. The lease includes a right for the landlord to terminate the lease on payment of £x to the tenant. V assigns the freehold reversion to P for a nominal sum. P exercises the right to terminate and pays Nominee £x. Under s.75A, the notional transaction is the acquisition of the unencumbered freehold by P from V, and the notional consideration chargeable is £x given by P to Nominee.
  4. V grants a 999-year lease to P for no premium and a peppercorn rent. The lease gives the landlord a right to terminate it within 14 days of the date of grant. P offers to pay V £x if V allows the 14 days to elapse without exercising the right to terminate. V does so. Under s.75A, the notional transaction is the grant by V of a 999-year lease to P and the notional consideration, which is the chargeable consideration, is £x, the amount paid by P and received by V.
  5. V agrees to sell property to X Ltd for £10 million. X Ltd declares a dividend in favour of P, the dividend to consist of the property and to be paid at the same time as completion of the V–X Ltd contract. The contract is completed and the property transferred to P. X argues that the £10 million is not chargeable to Stamp Duty Land Tax as his contract is disregarded under s.45. P argues that there is no Stamp Duty Land Tax charge on the transfer of the property to him because a dividend in specie is a transaction that does not constitute consideration for the purposes of the Stamp Duty Land Tax legislation. Under s.75A, the notional transaction is the acquisition of the property by P, and the notional consideration, which is the chargeable consideration, is £10 million, the amount received by V.
  6. V agrees to sell land to X, and X agrees to sell the same land to P which is a partnership where the partners are X, X1 Ltd. and X2 Ltd. companies connected to X which manage a trust for which X is the beneficiary. V and X enter an arrangement where V settles a nominal amount into X’s trust, thereby creating a connection between V and X as per s.839 of ICTA 1988. The V-X contract completes and at the same time and simultaneously the X–P contract completes. X claims that no Stamp Duty Land Tax is due as his contract is disregarded by s.45 of FA 2003, whilst P claims that no Stamp Duty Land Tax is due per Schedule 15 of FA 2003 given its connection with X. Section 75A applies and the notional transaction involved is V-P Stamp Duty Land Tax is due on the notional consideration which is the full amount of consideration received by V.

Other provisions

  • A transfer of shares or securities - or units in a unit trust scheme - is ignored for the purposes of s.75A if it would otherwise be the first of a series of scheme transactions (and several such transfers are likewise ignored if they all precede any other scheme transaction).
  • The notional transaction attracts any relief which it would attract if it were an actual land transaction.

Examples:

  1. V sells land to X and at the same time and simultaneously X sells to P. V, X and P are all companies within the same group. The notional transaction involved is V-P but, provided the conditions for group relief at Schedule 7 of FA 2003 are met, Group Relief will apply to the notional transaction.
  2. V sells land to X and at the same time and simultaneously X sells to P, which is a registered charity. The notional transaction involved is V-P; but, provided the conditions for Charities relief at Schedule 8 of FA 2003 are met, P can claim Charities relief which will apply to the notional transaction and no Stamp Duty Land Tax will be due.
  3. Section 75A does not apply where the relief is available only by reason of sections 71A to 73 (alternative property finance) or a provision in Schedule 9 (right to buy, shared ownership leases, etc.)
  4. If any of the scheme transactions is entered into for the purposes of, or in connection with, the transfer of an undertaking or part of an undertaking for the purposes of paragraphs 7 or 8 of Schedule 7 (reconstruction and acquisition relief) then the notional transaction is also deemed to be entered into for such purposes or in such connection. This enables the notional transaction to qualify for reconstruction or acquisition relief if the other conditions for relief are satisfied.
  5. The notional transaction will be subject to the market value rule in s53 if P is a company connected with V.
  6. Where applicable s.75A will charge consideration to tax regardless of the s45 position including any amount paid as a deposit.
  7. If part of the consideration for the notional transaction is a land transaction entered into by V as purchaser, or by P as vendor, then the market value rules in paragraph 5 of Schedule 4 will apply.
  8. An interest in a property investment partnership is treated as a chargeable interest for the purposes of s.75A.
  9. Where V or P is a partnership the provisions in Part 3 of Schedule 15 apply as they would to the transfer of a chargeable interest into or out of a partnership for all transactions with an effective date before 24 March 2010.
  10. But for transactions where the effective date is 24 March 2010 or later, S.75C(8)(b) no longer applies to treat the notional transaction between V and P as a transaction involving a partnership under Schedule 15. The normal rules under s75A will apply to ascertain the chargeable consideration on such transactions.