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LBTT group relief and share pledges

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From 1 April 2015, stamp duty land tax (SDLT) was replaced in Scotland with the land and buildings transaction tax (LBTT). The conditions for LBTT group relief are very similar to those for SDLT group relief, but in December 2017 Revenue Scotland published a technical bulletin stating that in their view where there is a share pledge over the shares in the purchasing company, but not the parent or the vendor, LBTT group relief would not be available. The Scottish government has now released a consultation to amend the conditions for LBTT group relief.
LBTT group relief is not available where, at the time of the transaction there are arrangements in place by virtue of which at that or some later time, a person has or could obtain control of the buyer but not the seller. The same condition applies for SDLT group relief.
Despite representations from taxpayers, industry bodies and other stakeholders, to the contrary, in December 2017 Revenue Scotland published a technical bulletin in which they stated that the pledging of shares as security constitutes an ‘arrangement’ under which a person (i.e. the lender holding the share pledge) could obtain control of the company in which the shares are pledged. Where that company is the purchaser in an intra-group transaction, LBTT group relief is not therefore available. This was clearly not the intention of the Scottish Parliament, and while, in our view, Revenue Scotland’s interpretation of the legislation is erroneous, it has led to uncertainty and confusion for taxpayers.
The Scottish government has launched a short consultation (see – four weeks, closing on 13 April – on proposed secondary legislation explicitly carving out from disqualifying arrangements those instances where shares in the purchasing company are used as security for debt on arm’s length terms. It is seeking comments to ensure that the legislation introduced on this issue addresses the issue effectively. The legislation will be in the form of a statutory instrument and will only apply prospectively, although the consultation indicates that retrospective application may be considered if thought necessary.
While we welcome the introduction of this secondary legislation and the clarity it provides, our view remains that where security arrangements are entered into on arm’s length commercial terms and there is no reason to believe that security rights over subsidiary shares will ever be exercised, the security should not constitute an arrangement under which the lender could gain control of that company. To deny relief where shares in the purchasing company are pledged as security is illogical and contrary to the stated intention of Parliament that LBTT group relief should apply where SDLT group relief had previously been available. While there is a similar carve out included within the SDLT legislation, this was only included for clarity and was not added until March 2013, having previously been confirmed in an extra statutory concession (ESC C10).
The fact that no specific provision was incorporated into the LBTT group relief legislation is not determinative in concluding whether group relief should be denied in such circumstances. Therefore, while, in our view, there is no requirement for retrospective legislation, it would put the availability of group relief beyond doubt and we would welcome the certainty for taxpayers that it would provide.
Issue: 1393
Categories: In brief , Stamp taxes