FB 2013: SDLT transfer of rights rules

The Finance Bill devotes 18 pages to transfers of rights, commonly referred to as ‘sub-sale relief’; two of these contain clauses 192 (pre-completion transactions: existing cases) and 193 (pre-completion transactions), and 16 of these are in Sch 37. Schedule 37 introduces FA 2003 new s 45 (transactions entered into before completion of contract), which will refer to FA 2003 new Sch 2A setting out the new detailed rules on transfers of rights which will now be known (and are referred to below) as ‘pre-completion transactions’.

The new rules will apply to transfers of rights under the existing s 45 and to pre-completion transactions entered into on or after the date on which the Finance Bill receives Royal Assent. The existing s 45, which is contained in a mere single page, will continue to apply (subject to the retrospective changes referred to below) until the new rules take effect.

There are another 20 pages of draft amendments to the SDLT legislation, which include the new reliefs from the 15% rate in Sch 38, and the simplifications to the liability and compliance obligations in respect of leases in Sch 39. This article comments on the draft transfer of rights legislation. Unless otherwise stated, references to clauses are to those in the Finance Bill and other statutory references are to those in FA 2003.

Clause 192 is a targeted anti-avoidance measure which will amend the existing s 45 with retrospective effect in relation to transfers of rights entered into on or after 21 March 2012, but will cease to apply in relation to transfers made on or after the date of Royal Assent of the Finance Bill (in respect of which the new rules will apply). It is intended to counteract two versions of an aggressive scheme designed to exploit perceived weaknesses in the existing s 45 and the SDLT ‘mini-GAAR’ in s 75A. The scheme is explained in a guidance note, entitled Stamp duty land tax avoidance: Retrospective changes to section 45 of the Finance Act 2003, which was published on the same date as the Finance Bill. This includes an overview of the amendments and guidance for parties who may be affected. Unsurprisingly, the guidance note states that HMRC does not believe that the scheme is effective and that changes to the legislation are being made to put the matter beyond doubt. Clause 192 is unlikely to be of general interest.

The detailed rules on what will now be called ‘pre-completion transactions’ are set out in Finance Bill Sch 37, which will introduce FA 2003 Sch 2A paras 1–20.

A draft guidance note (in addition to the Finance Bill explanatory notes), which includes a brief explanation and nine detailed examples of how the new rules will apply, was published with the Finance Bill. HMRC has invited comments on the draft guidance and it is intended that the final version will be incorporated into HMRC’s SDLT Manual.

Purpose of the new rules

Broadly, the new rules are designed to continue the policy of the existing rules, and to allow contracts for sub-sales and assignments to be completed so that the SDLT liability falls on the ultimate purchaser (referred to below as ‘the transferee’), with completion of prior transactions between the original seller and the original purchaser (referred to below as ‘the transferor’) being relieved. However, complex and convoluted drafting has been inserted to counteract avoidance, such as the scheme intended to be counteracted by cl 192 mentioned above, and the novation scheme which has recently been successfully challenged by HMRC in the First-tier Tribunal (see Edward Allchin [2013] UKFTT198). Not content with s 75A and a single targeted anti-avoidance provision, such as that in Sch 2A para 18, as well as the propensity of the tribunals and higher courts to interpret legislation in a way which renders schemes ineffective, the draftsman has opted for an assortment of sledgehammers.

Under the new rules, substantial performance and completion of the original contract will not be ‘disregarded’, as is the case under the existing rules. Instead, the new relief for a pre-completion transaction will have to be claimed in a return filed by the transferor.

What is caught?

Paragraph 1 defines a ‘pre-completion transaction’. Firstly, there must be a contract for the acquisition of a chargeable interest which is to be completed by a conveyance. Secondly, that contract must be followed by a pre-completion transaction which will arise where, as a result of a transaction, a person other than the original purchaser (‘the transferee’) becomes entitled to call for a conveyance of the whole or part of the subject matter of the original contract and where, immediately before the transaction, a person was entitled under the original contract to call for a conveyance. Hence, the relief for the transferor will not be available unless the transferor has entered into a contract with the transferee, under which the transferee becomes entitled to call for a conveyance, and that contract was entered into at a time when a person under the original contract (e.g. the transferor) was still entitled to call for a conveyance.

Paragraph 1(4) provides that the grant or assignment of an option is not a pre-completion transaction, and para 1(5) provides that a transaction which effectively discharges the original contract does not prevent it from being a pre-completion transaction, which is intended to ensure that the new rules apply to novations. Novations are not expressly mentioned in Sch 2A, but they are referred to in the explanatory notes and the draft guidance includes an example of how the new rules will apply to a novation. According to that example, the transferee will be liable to SDLT on the consideration which it pays the transferor for procuring the novation, as well as the consideration which it pays to the original vendor under the novated contract (although the guidance states that the transferor is not a purchaser under a land transaction, and therefore would not be required to file a return and claim the relief). Schedule 2A will not apply where Sch 17A para 12B (assignment of agreement for lease) applies.

Paragraph 3 provides that the transferee is not regarded as entering into a land transaction by reason of the pre-completion transaction.

Schedule 2A then divides pre-completion transactions into two categories:

• ‘assignments of rights’, which are dealt with in paras 4–8; and
• ‘free-standing transfers’, to which paras 9–11 will apply.

There is an assignment of rights if the transferee is entitled to exercise rights under the original contract, as would be the case if there was a legal assignment of the original contract. A ‘free-standing transfer’ includes any pre-completion transaction other than an assignment of rights, and would therefore include a conventional sub-sale.

The impact

These two categories are dealt with as follows:

• In the case of an assignment of rights (under which the transferee acquires rights that are exercisable under the original contract), the transferee’s chargeable consideration will include whatever it, or any person connected with it, gives under the original contract, as well as whatever it or any person connected with it gives for the assignment.
• In the case of a free-standing transfer (where the transferee does not acquire rights exercisable under the original contract), the transferee’s chargeable consideration includes consideration for the pre-completion transaction, as well as any other consideration given by the transferee or a person connected with it for the transaction.
• In the case of an assignment of rights, para 5 creates a ‘notional land transaction’ under which, upon completion or substantial performance of the original contract, the transferor is treated as making an acquisition separate from that of the transferee for chargeable consideration equal to whatever the transferor has agreed to provide under the original contract, plus (if relevant) whatever is given for a previous assignment. However, the transferor will generally be entitled to relief under para 15, which must be claimed in a return or an amendment to a return. This relief applies to the transferor’s notional land transaction and is conditional on the original contract not being substantially performed when the assignment of rights is entered into. However, since para 5(1) deems the effective date of the transferor’s notional land transaction to be the same as that of the transferee’s transaction, the relief is not expressed to be conditional on those transactions being completed or substantially performed at the same time. Where the original contract is rescinded or annulled after it has been substantially performed, para 6 gives the transferor the right to reclaim any tax paid in respect of the notional land transaction by making an amendment to the return filed in respect of the notional land transaction.
• Paragraph 7 deals with assignments of rights where the transferee is to acquire part only of the subject matter, and treats the original contract, so far as relating to the part to be acquired by the transferee, as a separate contract.
• There is no reference to a ‘notional land transaction’ in relation to a free-standing transfer, presumably because it is assumed that the transferor (who will retain the rights under the original contract) will incur a liability to SDLT on completion or substantial performance of the original contract based on the consideration given under that contract, whether or not it is completed or substantially performed at the same time as the transferee’s transaction. However, the transferor will generally be entitled to relief under para 16 (which applies to the transferor’s transaction following a free-standing transfer), provided that the pre-completion transaction is a ‘qualifying sub-sale’. This is defined as a contract under which the original purchaser contracts to sell the whole or part of the subject matter of the original contract to the transferee. Additionally, the qualifying sub-sale must complete at the same time as, and in connection with, the performance of the original contract, and the original contract must not be substantially performed before the qualifying sub-sale is entered into. The relief must be claimed in a return or an amendment to a return.
• There are provisions which deal with a series of two or more pre-completion transactions, including an assignment of rights which is followed by a free-standing transfer and vice versa. Broadly, each transferor in the series is treated as acquiring a chargeable interest upon substantial performance or completion of each notional land transaction (in the case of an assignment of rights) or upon substantial performance or completion of the original contract (in the case of a free-standing transfer), but will generally be entitled to relief, which must be claimed by each transferor in a return or an amendment to a return.

Further provisions

Schedule 2A contains the following anti-avoidance provisions:

• The minimum consideration rule in paras 12–14: this will apply only where the ultimate purchaser is either connected with, or not acting at arm’s length from, the transferor (or any other preceding transferor in a series of two or more pre-completion transactions). Where the rule applies, the chargeable consideration is increased to the higher of ‘the first minimum amount’ or ‘the second minimum amount’, if either of these is greater than the chargeable consideration determined under the normal rules. ‘The first minimum amount’, defined in para 13, is generally the amount due under the original contract. ‘The second minimum amount’, defined in para 14, is determined in accordance with a formula which will generally include the net amount given by each party to the transactions. However, the minimum consideration rule does not apply where the transferor and the transferee are unconnected and are acting at arm’s length, so that where, in such a case, there is a sub-sale at a loss on arm’s length terms, the transferee should be liable to SDLT on only the amount of the consideration which it actually provides. The draft guidance includes an example of how this rule will apply.
• Tax avoidance arrangements in para 18: this is a targeted anti-avoidance rule under which relief for a transferor is denied where it is reasonable to conclude that the obtaining of a tax advantage for the transferor or any other person was the main purpose, or one of the main purposes, of the transferor entering into the arrangements. For this purpose, ‘tax’ is not defined, so the provision is limited to avoidance of SDLT.

The new rules contain complex definitions of the person who is to be treated as ‘the vendor’, with separate definitions for assignments of rights and free-standing transfers. These were added in response to concerns, expressed during the consultation, that the original draft legislation repeated the unsatisfactory definition of ‘the vendor’ in the existing legislation, which is open to interpretation and doubt. Generally, the vendor for the transferee’s acquisition will be the vendor under the original contract. This is an improvement to the position under the existing rules, since it removes the concern that the chargeable consideration for the transferee’s acquisition could be increased to the property’s market value at the time when the transferee’s acquisition is completed, where the transferee is a company, or a partnership which includes a company, connected with the transferor. If the vendor under the original contract is treated as the vendor to the transferee then, if the transferee is not connected with that vendor, the market value rules in s 53 and in Sch 15 Part 3 will not apply. However, the general rule is subject to exceptions, which include claims for relief under s 61 (compliance with planning obligations) and s 66 (transfers involving public bodies) and, importantly, s 108 (linked transactions), under which ‘the vendor’ to the transferee can include either the vendor under the original contract or the transferor.

Schedule 37 para 6 amends s 79 (registration of land transactions), which contains the rules for certificates of compliance that are required to facilitate registration of land transactions. The general requirement in s 79(1) is disapplied in the circumstances set out in s 79(2), which currently refers to transactions which arise under the existing s 45. The amendment deletes that reference and adds a new reference to Sch 2A para 5. Since para 5 applies only to assignments of rights, there is a concern that, unless s 79 is further amended, following completion of a free-standing transfer, a sub-purchaser will be required to provide a certificate of compliance in respect of the transferor’s transaction, as well as a certificate in relation to their own transaction, in order to facilitate registration. This is a potential issue for conveyancers which, it is hoped, will be resolved before the new rules take effect.

Where does this leave us?

The new rules provide greater clarity than the existing rules in certain important respects, such as the identity of the vendor. Undoubtedly, they will be effective to deter avoidance, since anyone attempting to exploit the new rules will potentially face a double SDLT charge, one for the transferor, as well as one for the transferee. However, this objective has been achieved by making the new rules so complex that most advisers who will be applying them in practice will find them unintelligible and will choose to rely on HMRC’s guidance.

Marc Selby is a tax partner at Laytons Solicitors LLP