Finance Act 2011 seeks to block avoidance schemes based on combining so-called ‘sub-sale relief’ and the exemptions for alternative or Sharia financing of property transactions and also schemes which exploit the market value consideration rule where properties are exchanged. The changes to the rules which determine the chargeable consideration for exchanges of freeholds or leaseholds now require the SDLT charge to be on the higher of the market value of the property received or the consideration given instead of only on the market value of the property received. The Act has also introduced a relief for bulk acquisitions of dwellings together with a three-year recomputation and clawback period based on a conceptually odd comparison of what was originally intended by the purchaser versus what actually occurred in terms of the final number of dwellings.
FA 2011 (ss 81–82 and Schs 21–22) blocks two types of SDLT avoidance scheme and introduces a relief for the acquisition of two or more dwellings.
FA 2011 Sch 21 deals with two types of avoidance.
First, the transfer of rights or so-called ‘sub-sale relief’ rules in FA 2003 s 45(3) have been altered so that the substantial performance or completion of the original contract at the same time as that for the notional secondary contract, will no longer be disregarded for SDLT where the secondary contract gives rise to a transaction that is exempt from SDLT under any of the alternative finance exemptions in FA 2003 ss 71A- 73.
That is to say schemes relying on a purchase from a third party which fell to be disregarded for SDLT if there was an immediate sub-sale which itself attracted an alternative finance exemption, will no longer be exempt from SDLT on the original purchase. For good measure the definition of a ‘finance institution’ capable of attracting the alternative finance exemption in ITA 2007 s 564B is modified in SDLT so that consumer credit licensed person no longer qualifies for the exemption.
Second, the rules governing exchanges of properties where the chargeable consideration was taken as the market value of the property interest acquired have been altered in order to block a scheme which exploited these rules.
If either leg of an exchange involves a ‘major interest’ in land then chargeable consideration for each acquisition is now:
Prior to 24 March 2011 the chargeable consideration was taken to be only the market value of the interest acquired (plus any rent payable if the acquisition was the grant of a lease).
By charging SDLT on the actual chargeable consideration if greater than the market value of the interest acquired, the legislation has created a potentially harsh regime in the name of tackling avoidance.
The relative brevity of the legislative
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For example the altered rules could tax grandparents who exchange their expensive house worth say £2 million with a grandchild for his flat worth say £500,000, on the £2 million of actual consideration given by them rather than on the £500,000 value of the flat they receive in exchange (with the grandchild paying tax on the £2 million value of the house received).
It is understood that this type of consequence was not intended by HMRC and that HMRC may be willing to ameliorate this harsh result by bending the rules on just and reasonable apportionment of consideration in FA 2003 Sch 4 para 4.
This would work by treating £1.5 million of the £2 million value given by the grandparents being the excess over the value of the flat received by them as if it were a gift by them and as such not taxable consideration. This treatment appears to be concessionary and not supported by the relevant legislation and indeed re-open the door to avoidance. There are also problems with cash equality payments.
FA 2011 Sch 22 introduces a new relief for the acquisition of two or more dwellings under new FA 2003 s 58D and Sch 6B. The relief is intended to lower the SDLT cost involved in bulk purchases of residential property to improve the supply of private rented housing.
The relief operates by reducing the rate of SDLT charged on the acquisition of multiple dwellings which would normally be determined by the aggregate consideration so that it is related to the rate that would have been charged had the dwellings been acquired individually.
The relief must be claimed in the land transaction return. Code 28 (General) should be used in the return initially although a specific code for the relief is promised later this year.
Where a transaction or a scheme, arrangement or series of linked transactions includes multiple dwellings, the rate of tax charged in respect of the dwellings is computed by reference to the mean consideration ie the total consideration attributable to the dwellings divided by the number of dwellings. However, if the rate determined is nil, the rate is taken to be 1%.
Although FA 2003 s 58D and Sch 6B refer to ‘transfers’ involving multiple dwellings it is understood that HMRC accept that the granting of new leases is included in the relief.
The normal rule that the acquisition of six or more dwellings is treated as not being an acquisition of residential property is disapplied for the purpose of the relief.
A recomputation of the rate of tax and possible further return and payment of additional tax will be required where an event subsequently occurs which, had it occurred immediately before the effective date of the transaction, would have affected the relief so that more SDLT would have been payable.
Where less SDLT would have been payable as a result, then a recomputation and refund is not available. An example of a recomputation leading to possible additional tax would be if the number of dwellings was reduced after the effective date of the transaction.
However, the event to be caught must occur within the shorter of the period of three years beginning with the effective date of the transaction or the period between the effective date of the transaction and the date on which the purchaser disposes of the dwelling or dwellings to an unconnected purchaser.
In their guidance HMRC give the example of eight flats acquired for £1 million on which multiple dwellings relief is claimed. The rate of tax is found by dividing £1 million by eight giving £125,000. The nil rate is not available using the relief so the rate of tax is taken as 1%. If two flats are sold in the relevant period to an unconnected purchaser, this will not be an event requiring a recomputation of the rate.
If the remaining six flats are converted into three dwellings within the relevant period, then this will be a relevant event and a recomputation of the rate will be required. Therefore the original consideration of £1 million will be divided by five (the two sold plus the three converted dwellings) giving £200,000. The rate of tax will, however, remain unchanged at 1% and so no further return is required.
It should be noted that the relative brevity of the legislative provisions governing this relief – which one might kindly refer to as ‘open textured’ – leaves open many ambiguities in interpretation.
HMRC have sought to counter this with their recently published official guidance, some of which may be open to challenge by taxpayers in due course.
Patrick Cannon, Barrister, 15 Old Square
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