SDLT changes included in the Pre Budget Report
As part of the Pre-Budget Report published on 6 December 2006 the Government has announced measures to counter schemes designed to avoid stamp duty land tax. The measures are contained in Regulations made by the Treasury, which have effect (subject to transitional provisions) for transactions taking place on or after 6 December 2006.
The Stamp Duty Land Tax (Variation of the Finance Act 2003) Regulations 2006:
1. The Regulations were made by HM Treasury under powers contained in section 109 Finance Act 2003. They have immediate effect but will cease to have effect after 18 months and accordingly they will be replaced by permanent provisions in Finance Bill 2007.
2. The substantive part of the Regulations is the Schedule. The Schedule consists of two paragraphs. Paragraph 1 inserts a new section 75A into Finance Act 2003. Paragraph 2 amends the provisions in Part 3 of Schedule 15 Finance Act 2003 dealing with certain partnership transactions. Note that paragraph 2 is an anti-avoidance provision even though it is not explicitly described as such.
3. Statutory references are to Finance Act 2003 unless otherwise specified.
New section 75A
4. New section 75A applies where
- one person disposes of a chargeable interest and another person acquires that interest, or a chargeable interest derived from it, and
- a number of transactions (‘scheme transactions’) are involved in connection with the disposal and acquisition, and
- the total SDLT 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 (the ‘tax saving’ test).
5. ‘Chargeable interest’ is defined in section 48. The chargeable consideration for the notional land transaction that is taken into account for the tax saving test is discussed below.
6. The phrase ‘involved in connection with’ implies that there must be some connection between the disposal and acquisition on the one hand and the transactions on the other which goes beyond the fact that a number of transactions happen in chronological order. However it is not necessary that the transactions should be interdependent.
Example
V sells two properties at arm’s length to third party purchasers N1 and N2. At some later stage, 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. These transactions would not be within section 75A.
7. Where section 75A applies the individual scheme transactions are disregarded for SDLT purposes and SDLT is instead charged on the notional land transaction.
8. The chargeable consideration for the notional land transaction (and for the tax saving test) is the largest amount (or aggregate amount) given or received by any person in respect of the scheme transactions.
9. In determining what is a scheme transaction ‘transaction’ includes any land transaction but is not limited to land transactions. New section 75A gives examples of what might be scheme transactions but the list is not exhaustive. In particular a scheme transaction includes any kind of arrangement whether it could otherwise be described as a transaction.
10. The effective date of the notional land 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.
11. For the purposes of section 75A an interest in a partnership is treated as a chargeable interest so far as it concerns land owned by the partnership.
12. The notional land transaction attracts any relief which it would attract if it were an actual land transaction.
13. Some reliefs involve a number of transactions where the tax saving test may be satisfied. Accordingly section 75A does not apply where the tax saving test is satisfied by reason only of sections 71A to 73 (alternative property finance) or a provision in Schedule 9 (right to buy, shared ownership leases, etc).
14. Examples
The following examples illustrate the application of section 75A on the assumption that the tax saving test is satisfied. HM Revenue & Customs does not accept that the tax saving test is necessarily satisfied in any of these examples.
(1) V grants a 999-year lease to N for no premium and a peppercorn rent.
V assigns the freehold reversion to P for a nominal sum. P pays N £X
in consideration of N’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.
The notional land transaction is the acquisition of the freehold by P with
chargeable consideration of £X.
(2) V grants a 999-year lease to N for no premium and a peppercorn rent.
The lease includes a right for the landlord to termnate 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 N £X.
The notional land transaction is the acquisition of the freehold by P with
chargeable consideration of £X.
(3) 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.
The notional land transaction is the grant of a 999-year lease by V to P with
chargeable consideration of £X.
(4) V agrees to sell property to N for £10 million. N agrees to sub-sell
the property to P for £5. Both transactions are completed at the same
time.
The notional land transaction is the acquisition of the property by P and
the chargeable consideration is £10 million (the largest amount received
by any person in respect of the scheme transactions).
(5) V agrees to sell property to N Ltd for £10 million. N Ltd declares
a dividend in favour of P, its sole shareholder, the dividend to consist of
the property and to be paid at the same time as completion of the V–N
Ltd contract. The contract is completed and the property transferred to P.
The notional land transaction is the acquisition of the property by P and
the chargeable consideration is £10 million (the largest amount received
by any person in respect of the scheme transactions).
Amendments to the partnership provisions
15. There are amendments to
- the charge on transfers into partnerships set out in paragraphs 10-12 of Schedule 15
- the charge on transfers out of partnerships set out in paragraphs 18-20 of Schedule 15
- the charge on transfers of an interest in a property-investment partnership set out in paragraph 14 of Schedule 15.
16. The amendments to paragraphs 10-12 of Schedule 15 concern the calculation of the ‘sum of the lower proportions’ (‘SLP’). Before amendment the calculation provided for the interest of partners connected with a transferor to be included in the calculation of SLP. The amendments restrict this so that interest of a partner connected with a transferor is included in the calculation of SLP only if that partner is an individual.
17. However where a partner is a member of the same group as a transferor the amendments provide for relief, so that the charge is reduced to what it would have been if the interest of that partner had been included in the computation of SLP. This relief is governed by the same provisions that apply to group relief, with minor modifications.
Example
A Ltd, B Ltd, C Ltd and D are partners, sharing profits 40:35:15:10. A Ltd and B Ltd are members of the same group, owned by Mr X. C Ltd is also owned by Mr X, but is not a member of the same group as A Ltd and B Ltd. D is unconnected.
A Ltd transfers property into the partnership. Before the amendments SLP would have been 90, so there would have been a charge on 10 per cent of the market value of the property. Following the amendments SLP is 40 because the interests of companies connected with the transferor are not included. So there is a charge on 60 per cent of the market value of the property. However relief is available in respect of B Ltd’s 35 per cent interest to reduce the charge to 25 per cent of the market value. This relief will be withdrawn if (for example) B Ltd ceases to be a member of the same group as A Ltd while the partnership still owns the property.
18. The amendments to paragraphs 18-20 of Schedule 15 concern the calculation of the ‘sum of the lower proportions’ (‘SLP’). Before amendment the calculation provided for the interest of partners connected with a transferor to be included in the calculation of SLP. The amendments restrict this so that interest of a partner connected with a transferor is included in the calculation of SLP only if that partner is an individual.
19. For paragraphs 18-20 there is no relief similar to that described in paragraph 19 above.
20. The amendments to paragraph 14 of Schedule 15 make two changes. First they provide that where there is a transfer of a partnership interest, and the transferee is a person connected with the transferor who is not an individual, there is no requirement (as there currently is in paragraph 14(1)(b)) for consideration to be given.
21. Second they clarify existing legislation to put it beyond doubt that the provisions for recovery of group relief apply where group relief is claimed on the transfer of a partnership interest.
22. Enquiries as to the application of these provisions to specific transactions should be made to the Birmingham Stamp Office.
Stamp duty land tax on new Zero carbon homes
In support of the target that by 2017 all new homes will be required to reach the zero carbon standard, this Pre-Budget report announces that a stamp duty land tax relief for the majority of new homes that meet the zero carbon standard will be introduced in 2007. The relief will be time limited but will help kick start demand for zero carbon homes through an incentive to homebuyers, and recognises that in order to raise energy efficiency standards significantly beyond where they are now the industry will have to modernise production methods and innovate through employment of new materials and technologies. Full details will be published at the time of the Budget 2007.
