The land transaction tax (LTT) will replace SDLT for land transactions in Wales from 1 April 2018. Many of the provisions of SDLT have been incorporated into the LTT Bill, as tax practitioners emphasised the need for consistency of LTT with SDLT following extensive consultations by the Welsh government. The LTT Bill does introduce a targeted anti-avoidance rule (TAAR), in relation to claiming LTT reliefs; and a Welsh general anti-avoidance rule (GAAR), in relation to Welsh devolved taxes (currently LTT and landfill disposals tax). Solicitors and conveyancers may face problems dealing with land transactions that straddle the border between England and Wales. Rates and bands of LTT will not be published until much closer to April 2018.
Andrew Evans (Geldards) examines the provisions in the Land Transaction Tax and Anti-Avoidance of Devolved Taxes (Wales) Bill.
Stamp duty land tax (SDLT) will cease to apply to land transactions taking place in Wales from 1 April 2018. The financial settlement provided by the UK government in Westminster to the Welsh government in Cardiff will be reduced by the amount of SDLT that was collected up to the date of the ‘switch off’. Therefore, if the Welsh government did not introduce its own version of SDLT, it would lose tax revenue from SDLT, which is forecast to be £244m in 2018/19. Unsurprisingly, the Welsh government has decided to introduce its own version of SDLT, which will be called land transaction tax (LTT). LTT, along with landfill disposals tax, will be the first new Welsh tax for 800 years. The same process took part in Scotland in 2015 with the introduction of the land and buildings transaction tax (LBTT).
The Land Transaction Tax and Anti-Avoidance of Devolved Taxes (Wales) Bill (‘the Bill’) was introduced into the National Assembly for Wales for scrutiny on 12 September 2016. As the title of the Bill suggests, although it deals with LTT, it also introduces tax anti-avoidance measures, more of which later. The Finance Committee of the Welsh government invited written comments on the Bill by the end of September, with evidence being given before the Finance Committee on 13 October 2016.
The Welsh government has carried out extensive consultations on the form of LTT with stakeholders in Wales via the Tax Advisory Group, various tax forums and formal consultation exercises. A key message resulting from the consultations was that LTT should be consistent, wherever possible, with the existing SDLT legislation. To a large extent, this has been achieved with the draft provisions of the Bill, and LTT can be described as ‘the same but different’ when compared to SDLT. Tax practitioners familiar with SDLT may find the LTT legislation is set out in a different order but they will recognise much of the drafting, which has been lifted from the SDLT provisions contained within the Finance Act 2003.
The Bill replicates the well established SDLT concepts of taxing land transactions rather than documents, ensuring that substantial performance triggers the payment dates and the new method of allowing sub-sale reliefs, with the copying over of the FA 2003 Sch 2A provisions dealing with pre-completion transactions and freestanding transfers.
Many of the reliefs have been given their own schedule within the Bill, rather than the details of the relief falling within the clause numbers of the Bill. Therefore, the LTT provisions are perhaps more logical in how they have been set out than the SDLT provisions.
Tax advisers who have got to grips with the partnership rules for SDLT will be delighted to know that the provisions of FA 2003 Sch 15 have been incorporated into the Bill (in Sch 6). The usual reliefs for charities, registered social landlords, corporate group transfers and reorganisations, alternative property finance, sale and lease backs and multiple dwellings reliefs continue under LTT. A couple of reliefs have not been transferred, namely relief on the transfers of Scottish crofts, not really relevant to land in Wales, and the demutualisation of building societies.
The Bill does introduce two new tax avoidance provisions, namely a targeted anti-avoidance rule (TAAR), contained within clause 31 of the Bill; and a general anti-avoidance rule (GAAR), contained within clause 65, which will introduce a new Part 3A into the Tax Collection and Management (Wales) Act 2016. That Act gave the power to establish the Welsh Revenue Authority (WRA), which will be the Welsh equivalent of HMRC. The Welsh government has made the decision that all the administration and collection of LTT will be carried out by WRA with no outsourcing of roles to HMRC. The SDLT anti-avoidance provisions in FA 2003 ss 75A–75C have not made it into the Bill.
The TAAR applies to any relief which can be claimed in relation to LTT. The provision ensures that relief from LTT will not be available in relation to a land transaction that is a tax avoidance arrangement, or which forms part of arrangements that are tax avoidance arrangements. Tax is defined widely and includes not just LTT but income tax, corporation tax, capital gains tax, SDLT, stamp duty reserve tax and stamp duty. The TAAR applies to the obtaining of a tax advantage where the ‘arrangement lacks genuine economic or commercial substance other than the obtaining of a tax advantage’. The TAAR denies relief where the obtaining of a tax advantage is the main purpose or one of the main purposes of the transaction. There is a risk that the use of ‘one of the main purposes’, rather than ‘the sole or main purpose’, creates a low threshold for the refusal of a relief. For example, with sale and leaseback relief, the relief for the leaseback element is only available to the company selling the property. Would the TAAR prevent group relief being claimed if an intra-group transfer of a property was made, so that the property was to be held and sold by the company to which the lease was to be granted?
The GAAR is a general anti-avoidance rule and is formulated on a different basis to the current UK general anti-abuse rule. Like the TAAR, the GAAR applies where the obtaining of a tax advantage is ‘one of the main purposes’ of the transaction. The Welsh GAAR does not contain a double reasonableness test. Instead, it requires arrangements in order to be ‘safe’ from attack to be consistent with generally prevailing practice; and for the WRA to have indicated its acceptance of that practice. At present, the Welsh GAAR only applies to devolved taxes and will therefore apply to LTT and landfill disposals tax from 1 April 2018.
The Chartered Institute of Taxation (CIOT), in its written submission to the Finance Committee of the Welsh government, suggested that the TAAR should be limited to LTT while the GAAR should be extended to all taxes. The Law Society in its written submissions pointed out that transactions in England may not be caught by the general anti-abuse provisions, while a transaction in Wales could be subject to the tax avoidance clauses. Both the TAAR and the Welsh GAAR will require the publication of guidance by the WRA as to what is and what is not acceptable in relation to various transactions. It will also be interesting to discover whether the WRA will introduce a clearance procedure to assist those taxpayers and their advisers operating at the margins of what may or may not be acceptable, and to provide answers in sufficient time to minimise delays to transactions. Finally, as there are no current proposals for a DOTAS regime in Wales, the WRA may struggle to apply the TAAR if it is not aware of the potential loss of non-devolved tax in Wales and the remainder of the UK. No doubt there will be regular exchanges of information between HMRC and the WRA.
Surprisingly, there is no definitive map showing the border between England and Wales. Transactions involving a property that straddles the border will be required to submit both a SDLT return and a LTT return to the relevant tax authorities. The transactions will also be linked, so that the taxpayer can only claim the benefit of one exempt band. The apportionment of the consideration will have to be made on a ‘just and reasonable’ basis. It is anticipated that advisers will make greater use of the guidance available from the Valuation Office Agency in order to justify the apportionment of the consideration. The guidance will be important for a transaction involving farmland, particularly if the farmhouse is in England and the majority of the farmland is in Wales and perhaps with some of the land having hope value regarding future development. Conveyancers may need to make greater use of land valuers in order to support a ‘just and reasonable’ apportionment.
The Welsh government published a research paper on setting the rates and bands for LTT on 15 September 2016, as the Bill does not include details of the rates and bands. The Welsh government does not intend to set the rates and bands until shortly before the implementation date on 1 April 2018. The Welsh government does not wish to repeat the example of Scotland, where the rates for LBTT were announced in October 2014 and amended in January 2015, following the Autumn Statement in November 2014, which removed the slab system for residential properties. There was also a substantial rush to complete high value residential transactions in the month before the introduction of LBTT, as a consequence of higher rates of LBTT for high value properties compared to SDLT. A balancing payment of £20m was paid as part of Scotland’s Fiscal Framework Settlement by the Westminster government to compensate Scotland for the shortfall in LBTT. It is also anticipated that comprehensive anti-forestalling rules will be introduced.
The Welsh government also consulted in September 2016 on the introduction of the additional 3% surcharge on the purchase of additional residential properties, as details of the surcharge were not contained within the Bill. On 14 October 2016, the Welsh government announced its intention to introduce a higher rate of tax on the purchase of additional residential properties. The rate of the additional surcharge will be decided at the same time as the announcement of the rates for LTT. Draft provisions will be introduced into the Bill during stage two of the consideration of the Bill by the Welsh Assembly.
One thing we do know is that the Welsh government will adopt a progressive rate of LTT, so that higher value properties will be subject to higher rates of LTT. The Welsh government is hampered by what it can do, because the average house price in Wales in July 2016 was £145,000; and it is estimated that only just over half the property transactions (both residential and commercial) in Wales result in a SDLT liability.
Tax advisers and solicitors and other conveyancers who deal with Welsh property will need to keep an eye on the passage of the Bill, which is anticipated to receive royal assent in April 2017. Advisers will have to understand how the provisions will apply to land transactions in Wales from 1 April 2018, and any subtle differences between the LTT legislation and the current SDLT provisions. The delay in the announcement of the LTT rates will cause an element of uncertainty. However, as the Welsh government will have to raise a similar amount of tax as currently raised by SDLT, it can be anticipated that the rates will be similar to the current rates of SDLT. Solicitors and conveyancers will also have to understand the procedures for the filing of the LTT returns with the WRA, and potentially register with the WRA to use electronic filing, which is being encouraged by the Welsh government. The next 18 months will certainly prove interesting for professionals advising on Welsh land transactions.
The land transaction tax (LTT) will replace SDLT for land transactions in Wales from 1 April 2018. Many of the provisions of SDLT have been incorporated into the LTT Bill, as tax practitioners emphasised the need for consistency of LTT with SDLT following extensive consultations by the Welsh government. The LTT Bill does introduce a targeted anti-avoidance rule (TAAR), in relation to claiming LTT reliefs; and a Welsh general anti-avoidance rule (GAAR), in relation to Welsh devolved taxes (currently LTT and landfill disposals tax). Solicitors and conveyancers may face problems dealing with land transactions that straddle the border between England and Wales. Rates and bands of LTT will not be published until much closer to April 2018.
Andrew Evans (Geldards) examines the provisions in the Land Transaction Tax and Anti-Avoidance of Devolved Taxes (Wales) Bill.
Stamp duty land tax (SDLT) will cease to apply to land transactions taking place in Wales from 1 April 2018. The financial settlement provided by the UK government in Westminster to the Welsh government in Cardiff will be reduced by the amount of SDLT that was collected up to the date of the ‘switch off’. Therefore, if the Welsh government did not introduce its own version of SDLT, it would lose tax revenue from SDLT, which is forecast to be £244m in 2018/19. Unsurprisingly, the Welsh government has decided to introduce its own version of SDLT, which will be called land transaction tax (LTT). LTT, along with landfill disposals tax, will be the first new Welsh tax for 800 years. The same process took part in Scotland in 2015 with the introduction of the land and buildings transaction tax (LBTT).
The Land Transaction Tax and Anti-Avoidance of Devolved Taxes (Wales) Bill (‘the Bill’) was introduced into the National Assembly for Wales for scrutiny on 12 September 2016. As the title of the Bill suggests, although it deals with LTT, it also introduces tax anti-avoidance measures, more of which later. The Finance Committee of the Welsh government invited written comments on the Bill by the end of September, with evidence being given before the Finance Committee on 13 October 2016.
The Welsh government has carried out extensive consultations on the form of LTT with stakeholders in Wales via the Tax Advisory Group, various tax forums and formal consultation exercises. A key message resulting from the consultations was that LTT should be consistent, wherever possible, with the existing SDLT legislation. To a large extent, this has been achieved with the draft provisions of the Bill, and LTT can be described as ‘the same but different’ when compared to SDLT. Tax practitioners familiar with SDLT may find the LTT legislation is set out in a different order but they will recognise much of the drafting, which has been lifted from the SDLT provisions contained within the Finance Act 2003.
The Bill replicates the well established SDLT concepts of taxing land transactions rather than documents, ensuring that substantial performance triggers the payment dates and the new method of allowing sub-sale reliefs, with the copying over of the FA 2003 Sch 2A provisions dealing with pre-completion transactions and freestanding transfers.
Many of the reliefs have been given their own schedule within the Bill, rather than the details of the relief falling within the clause numbers of the Bill. Therefore, the LTT provisions are perhaps more logical in how they have been set out than the SDLT provisions.
Tax advisers who have got to grips with the partnership rules for SDLT will be delighted to know that the provisions of FA 2003 Sch 15 have been incorporated into the Bill (in Sch 6). The usual reliefs for charities, registered social landlords, corporate group transfers and reorganisations, alternative property finance, sale and lease backs and multiple dwellings reliefs continue under LTT. A couple of reliefs have not been transferred, namely relief on the transfers of Scottish crofts, not really relevant to land in Wales, and the demutualisation of building societies.
The Bill does introduce two new tax avoidance provisions, namely a targeted anti-avoidance rule (TAAR), contained within clause 31 of the Bill; and a general anti-avoidance rule (GAAR), contained within clause 65, which will introduce a new Part 3A into the Tax Collection and Management (Wales) Act 2016. That Act gave the power to establish the Welsh Revenue Authority (WRA), which will be the Welsh equivalent of HMRC. The Welsh government has made the decision that all the administration and collection of LTT will be carried out by WRA with no outsourcing of roles to HMRC. The SDLT anti-avoidance provisions in FA 2003 ss 75A–75C have not made it into the Bill.
The TAAR applies to any relief which can be claimed in relation to LTT. The provision ensures that relief from LTT will not be available in relation to a land transaction that is a tax avoidance arrangement, or which forms part of arrangements that are tax avoidance arrangements. Tax is defined widely and includes not just LTT but income tax, corporation tax, capital gains tax, SDLT, stamp duty reserve tax and stamp duty. The TAAR applies to the obtaining of a tax advantage where the ‘arrangement lacks genuine economic or commercial substance other than the obtaining of a tax advantage’. The TAAR denies relief where the obtaining of a tax advantage is the main purpose or one of the main purposes of the transaction. There is a risk that the use of ‘one of the main purposes’, rather than ‘the sole or main purpose’, creates a low threshold for the refusal of a relief. For example, with sale and leaseback relief, the relief for the leaseback element is only available to the company selling the property. Would the TAAR prevent group relief being claimed if an intra-group transfer of a property was made, so that the property was to be held and sold by the company to which the lease was to be granted?
The GAAR is a general anti-avoidance rule and is formulated on a different basis to the current UK general anti-abuse rule. Like the TAAR, the GAAR applies where the obtaining of a tax advantage is ‘one of the main purposes’ of the transaction. The Welsh GAAR does not contain a double reasonableness test. Instead, it requires arrangements in order to be ‘safe’ from attack to be consistent with generally prevailing practice; and for the WRA to have indicated its acceptance of that practice. At present, the Welsh GAAR only applies to devolved taxes and will therefore apply to LTT and landfill disposals tax from 1 April 2018.
The Chartered Institute of Taxation (CIOT), in its written submission to the Finance Committee of the Welsh government, suggested that the TAAR should be limited to LTT while the GAAR should be extended to all taxes. The Law Society in its written submissions pointed out that transactions in England may not be caught by the general anti-abuse provisions, while a transaction in Wales could be subject to the tax avoidance clauses. Both the TAAR and the Welsh GAAR will require the publication of guidance by the WRA as to what is and what is not acceptable in relation to various transactions. It will also be interesting to discover whether the WRA will introduce a clearance procedure to assist those taxpayers and their advisers operating at the margins of what may or may not be acceptable, and to provide answers in sufficient time to minimise delays to transactions. Finally, as there are no current proposals for a DOTAS regime in Wales, the WRA may struggle to apply the TAAR if it is not aware of the potential loss of non-devolved tax in Wales and the remainder of the UK. No doubt there will be regular exchanges of information between HMRC and the WRA.
Surprisingly, there is no definitive map showing the border between England and Wales. Transactions involving a property that straddles the border will be required to submit both a SDLT return and a LTT return to the relevant tax authorities. The transactions will also be linked, so that the taxpayer can only claim the benefit of one exempt band. The apportionment of the consideration will have to be made on a ‘just and reasonable’ basis. It is anticipated that advisers will make greater use of the guidance available from the Valuation Office Agency in order to justify the apportionment of the consideration. The guidance will be important for a transaction involving farmland, particularly if the farmhouse is in England and the majority of the farmland is in Wales and perhaps with some of the land having hope value regarding future development. Conveyancers may need to make greater use of land valuers in order to support a ‘just and reasonable’ apportionment.
The Welsh government published a research paper on setting the rates and bands for LTT on 15 September 2016, as the Bill does not include details of the rates and bands. The Welsh government does not intend to set the rates and bands until shortly before the implementation date on 1 April 2018. The Welsh government does not wish to repeat the example of Scotland, where the rates for LBTT were announced in October 2014 and amended in January 2015, following the Autumn Statement in November 2014, which removed the slab system for residential properties. There was also a substantial rush to complete high value residential transactions in the month before the introduction of LBTT, as a consequence of higher rates of LBTT for high value properties compared to SDLT. A balancing payment of £20m was paid as part of Scotland’s Fiscal Framework Settlement by the Westminster government to compensate Scotland for the shortfall in LBTT. It is also anticipated that comprehensive anti-forestalling rules will be introduced.
The Welsh government also consulted in September 2016 on the introduction of the additional 3% surcharge on the purchase of additional residential properties, as details of the surcharge were not contained within the Bill. On 14 October 2016, the Welsh government announced its intention to introduce a higher rate of tax on the purchase of additional residential properties. The rate of the additional surcharge will be decided at the same time as the announcement of the rates for LTT. Draft provisions will be introduced into the Bill during stage two of the consideration of the Bill by the Welsh Assembly.
One thing we do know is that the Welsh government will adopt a progressive rate of LTT, so that higher value properties will be subject to higher rates of LTT. The Welsh government is hampered by what it can do, because the average house price in Wales in July 2016 was £145,000; and it is estimated that only just over half the property transactions (both residential and commercial) in Wales result in a SDLT liability.
Tax advisers and solicitors and other conveyancers who deal with Welsh property will need to keep an eye on the passage of the Bill, which is anticipated to receive royal assent in April 2017. Advisers will have to understand how the provisions will apply to land transactions in Wales from 1 April 2018, and any subtle differences between the LTT legislation and the current SDLT provisions. The delay in the announcement of the LTT rates will cause an element of uncertainty. However, as the Welsh government will have to raise a similar amount of tax as currently raised by SDLT, it can be anticipated that the rates will be similar to the current rates of SDLT. Solicitors and conveyancers will also have to understand the procedures for the filing of the LTT returns with the WRA, and potentially register with the WRA to use electronic filing, which is being encouraged by the Welsh government. The next 18 months will certainly prove interesting for professionals advising on Welsh land transactions.
