This article summarises the main changes proposed in the draft clauses of the Finance Bill 2013, with particular reference to the transfer of rights (sub-sale) rules.
The other main points are:
- the introduction of reliefs from the 15% charge applying to the acquisition of properties over £2m ('expensive properties') by non-natural persons
- simplification of rules applying to leases
Transfer of rights
The transfer of rights rules, which are more commonly known as the sub-sale or assignment rules exist to prevent a double charge to SDLT.
They apply where A agrees to sell land to B ('original contract') which is to be completed by a transfer, followed by a sub-sale, assignment or other transaction (relating to the whole or part of the subject-matter of the original contract) as a result of which C becomes entitled to call for a transfer to him ('secondary contract') of the whole or part of the land.
Provided the original contract is completed or substantially performed at the same time as the secondary contract, the original contract is ignored for SDLT purposes, with SDLT only payable on the secondary contract. The amount of SDLT is calculated on the consideration given by C to B for the sub-sale/assignment plus whatever remains outstanding under the original contract.
As a result of its drafting, this has formed the basis of many of the SDLT avoidance schemes. HMRC has made a number of attempts to close the avoidance possibilities, including the enactment of a general anti-avoidance provision. At the same time it has started taking a number of cases to the tax tribunals to challenge some of the more widely marketed avoidance schemes, with varying degrees of success.
As part of its efforts to tighten up avoidance opportunities, HMRC has rewritten the relevant legislation dealing with transfer of rights.
The main changes made by the legislation are:
- the relief is only going to be available for sub-sales and assignments of contracts, subject to the same provisions as before, regarding timing
- for the intermediary to obtain relief (i.e. B in the above narrative) B has to claim the relief
- where B and C are connected persons and also where they are not dealing at arm's length, the transaction between B and C is deemed to take place at market value
A number of comments can be made about the new rules:
- the restriction of the relief to sub-sales and assignments means that the more egregious forms of SDLT avoidance, including novations and distributions will no longer qualify for relief;
- the relief will only apply if it relates to the same interest in the property rather than a derivative interest. For example, if A agrees to sell a freehold to B the grant of a lease from B to C would not qualify. Whilst this is HMRC's professed position on the current legislation, it is not supported by the legislation itself
- HMRC's view is that only about 1,000 transactions a year will be affected. It is not clear where this figure comes from since there are no statistics to back it up. More profoundly, it is likely to mean that the documentation involving sub-sales and assignments is likely to become considerably more negotiated and complicated. The reason for this is that the intermediate purchaser has to claim the relief. This makes it more likely that both the intermediate purchaser and the ultimate purchaser will want to insert contractual provisions to protect their position to ensure that each qualify for relief and cannot do anything which may affect the other's position
- the new drafting is long-winded and complex. In practice, it is likely to increase the professional time that has to be spent in ensuring that the requirements for relief to be available are met
Reliefs on expensive property
The Government has announced that the reliefs available for expensive property will be identical to those which apply to the annual property residential tax (APRT). One anomaly with the APRT is that the reliefs for SDLT will only be available from the date of Royal Assent, likely to be in late July, whereas the identical reliefs for APRT will apply from 1 April. The reliefs that will be available include:
- properties that are used for letting, trading or being redeveloped
- properties held by charities for charitable purposes
- publically owned properties
- farmhouses occupied by farmers or farm workers
Lease simplification measures
The main changes are:
- the abolition of the abnormal rent increase charge with effect from Royal Assent
- the simplification of the rules dealing with fixed term leases and agreements for lease
Whilst there are some positive aspects to the reforms these are completely outweighed by the excessive complexity of the revised provisions dealing with transfer of rights, which could have been dealt with in a considerably simpler manner.
Given the extensive anti-avoidance legislation in place it is difficult to see the justification for making the provisions on transfer of rights so much more complicated.