Preventing Avoidance
Legislation will be introduced in Finance Bill 2011 to make three changes to ensure or put beyond doubt that certain stamp duty land tax avoidance schemes are ineffective. The changes affect:
- the relationship between the rules on sub-sales and the Alternative Finance reliefs;
- the definition of a 'financial institution' for the purposes of the SDLT Alternative Finance reliefs; and
- the way the consideration is determined where land is exchanged.
The first measure renders ineffective schemes that employ the
combination of a sub-sale and alternative finance reliefs.
Currently, as you know, where a sub-sale is structured correctly
the transaction between A and B is ignored and SDLT is chargeable
if at all on the acquisition by C, who acquires the property under
the sub-sale, only. So schemes had been structured whereby B
(a private individual) sub-sold to C (typically a Channel Island
protected cell company), which was constituted as a financial
institution such that it could benefit from alternative finance
relief. These schemes were widely sold although there are
technical arguments to the effect that they did not work. The
position is now put beyond doubt because the sub-sale provisions
will from tomorrow specify that this treatment is not available
where they are combined with the Alternative Finance reliefs in a
way which would remove any SDLT charge on the purchase of an
interest in land by B, i.e. where the acquisition by C is an exempt
sale to a financial institution.
In respect of the second measure, "financial institution"
includes banks, building societies and insurance companies. An
additional way to qualify as a 'financial institution' is
to hold a Consumer Credit Licence. From tomorrow, to prevent
abuse, it will no longer be possible to qualify as a 'financial
institution' just by holding a Consumer Credit Licence.
Regarding the third measure, where a major interest in land is
exchanged for another interest in land, the chargeable
consideration is determined by the market value of the interest
acquired. From tomorrow the chargeable consideration will be
changed to be the greater of (a) the market value of the interest
acquired, and (b) what the chargeable consideration would be under
the normal rules for consideration. The change to these rules
ensures that SDLT avoidance will not be possible by the
manipulation of the market value of the interest acquired.
Very broadly, the new rules come into effect at the beginning of 24
March 2011 except that arrangements entered into earlier fall under
the old rules unless they are altered after commencement.
Relief for bulk residential purchases
A new relief for bulk purchases of residential property will be
introduced with effect from Royal Assent. Instead of the rate
of SDLT being determined by looking at the aggregate consideration
provided for numerous, linked residential transactions, it will be
determined by the mean consideration, i.e. by the aggregate
consideration divided by the number of dwellings (subject to a
minimum rate of 1 per cent).
For the purposes of the relief, the dwellings will be treated as
residential property, however many dwellings are involved
(currently the acquisition of six dwellings or more is not treated
as residential).
The relief's purpose is said to be to promote institutional
investment in the private rented sector. Accordingly HMRC has
confirmed that the relief will not cover transfers of interests in
dwellings which are themselves subject to a lease of 21 years or
more, where such lease is not transferred in the same or a linked
transaction.
The exact scope of the relief is as yet unclear and we await draft
legislation; will it apply to long leases that have less than 21
years left to run, will there be an express requirement for the
property to be let on short leases?
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 30/03/2011.
