SDLT transfer of rights: draft Finance Bill 2013

Practical Law UK Legal Update 0-523-4292 (Approx. 9 pages)

SDLT transfer of rights: draft Finance Bill 2013

by PLC Tax

Background

"Transfer of rights" rules

A "transfer of rights" is the generic SDLT term covering sub-sales, assignments and other transactions. A transfer of rights occurs where:

There is a contract for a land transaction entered into between party A and party B that is to be completed by a conveyance.
As a result of a further transaction, which could be a sub-sale, assignment or other transaction, a person other than B (party C) becomes entitled to call for a conveyance to him.

The SDLT treatment of a transfer of rights is governed by section 45 of the Finance Act 2003 (section 45). (There are also transfer of rights provisions in section 45A of the Finance Act 2003 (section 45A) that apply to arrangements under which A may be directed by B to transfer property to C.) Under section 45, C is treated as the purchaser under a notional "secondary contract" and liable to tax on the aggregate of the consideration given for the transfer of rights plus any consideration given by C (or any connected party) under the original contract. If the transaction between A and B completes at the same time as (and in connection with) the transaction between B and C, the completion of the former transaction is disregarded for SDLT purposes (there is no SDLT charge on B and B is not required to file an SDLT return). For more detail, see Practice note, SDLT and contracts for the transfer of land: Transfers of rights: sub-sales, assignments and other transactions.

SDLT avoidance

There has been wide-spread use of the transfer of rights provisions to avoid SDLT. HMRC highlighted this in June 2010 when it published Spotlight 10 on SDLT avoidance (see Legal update, HMRC targets SDLT sub-sale avoidance schemes). The Solicitors Regulation Authority (SRA) registered its concern about the seemingly indiscriminate marketing and use of some schemes when it warned solicitors who are, or are considering becoming, involved in promoting or facilitating SDLT saving schemes (for residential or commercial property) to consider whether they can comply with the SRA's Principles (see Legal update, SRA warning about SDLT saving schemes).

Generally, SDLT avoidance schemes rely on the disregard of the A-B transaction under the transfer of rights rules and claim no charge arises on C either because C pays no consideration for the transfer or claims the benefit of a relief or exemption. To date only two SDLT avoidance cases have reached the tribunals (see Legal update, Upper Tribunal agrees SDLT sub-sale relief available on sale of land to partnership and SDLT sub-sale distribution in specie avoidance scheme fails (First-tier Tribunal)). However, it is noteworthy that in both of these cases the facts arose before the introduction of section 75A of the Finance Act 2003 (as to which, see Practice note, Stamp duty land tax: Scheme transactions: an anti-avoidance measure).

Transfer of rights consultation

On 17 July 2012, HMRC published a consultation document advancing two alternative options for reforming the transfer of rights rules. Both options envisaged removing the existing disregard of B's acquisition, treating both B and C as making acquisitions, thus creating two potential SDLT charges. However, B would be eligible to claim relief (by filing a return), allowing HMRC to monitor more closely transfers of rights transactions (under existing rules, B is not required to file a return as the A-B transaction is disregarded).

Under option 1, B's relief would be limited to the amount paid by C, resulting in an SDLT charge for B if C paid less than B for the property. Under option 2, B's relief would not be so restricted. Other proposals canvassed included:

Denying relief if B's acquisition formed a part of tax avoidance arrangements.
Restricting relief to transactions into which B entered in the course of a bona fide property trade or business.

For more information, see Legal update, Consultation on revising SDLT sub-sale relief.

Draft legislation and response document

On 11 December 2012, draft legislation to introduce changes to the SDLT transfer of rights provisions, which will apply to transactions with an effective date on or after the date on which the Finance Bill 2013 receives Royal Assent, was published together with a summary of responses to HMRC's July 2012 consultation document. The intention is for the new rules to apply to straightforward transfers of rights for commercial reasons in the same manner as for existing transfers. However, the revised rules make a number of refinements including the requirement for B (and any other intermediate purchasers) to file and return specifically claiming relief.

In pursuit of clarity, this legal update adopts the familiar shorthand terms used for transfers of rights.. In particular, this legal update focuses attention on the sub-sale and assignments paradigms, which assume that:

A contracts to sell land to B under the A-B contract.
In the case of an assignment, B assigns the benefit of the A-B contract to C, which is completed by a transfer from A to C.
In the case of a sub-sale, B contracts to sell the same land (or part) being acquired under the A-B contract to C, which is completed either by a transfer from A to C or by a transfer from B to C (soon after a transfer from A to B).

The draft Finance Bill 2013 provisions are in the form of a Schedule that re-writes section 45, inserting new sections 45ZA to 45ZK into the Finance Act 2003. The statutory references referred to below are to these draft Finance Bill 2013 provisions.

The draft legislation, which adopts option 2 (see Transfer of rights consultation):

Completely re-writes section 45, dealing with assignments separately from other transfers of rights (essentially, sub-sales).
Treats both B and C as acquiring a chargeable interest and, therefore, within the scope of SDLT. However, B will be entitled to claim relief on filing a land transaction return unless the transfer of rights forms part of any tax avoidance arrangements.
Requires B's land transaction return to be a full return; the government has rejected the suggestion that B should be entitled to file a reduced return although it will listen to representations on whether a return (and claim) may be dispensed with in limited circumstances (for example, "some standard group arrangements").
If B and C are connected with each other or are not acting at arm's length, C will be liable to SDLT on the higher of the:
- amount C pays;
- price under the A-B contract; and
- total of the net sums (that is, the amounts given, less any amounts received, for the acquisition of the chargeable interest or the transfer of rights) given by B and C.
(Sections 45ZF and 45ZG.) (This is the minimum consideration rule.)
Does not include the proposal restricting relief to transactions into which B entered in the course of a bona fide property trade or business.
Retains the requirement that, for sub-sales, the A-B and B-C transactions must be substantially performed or completed at the same time (and in connection with each other). The government rejected suggestions made by some that the legislation should specify an acceptable gap (for example, 12 hours, 24 hours or seven days).
Retains the transactional scope of the relief. The government rejected suggestions that relief should be extended to apply where B grants a lease out of the freehold (or other estate) transferred to B.
The grant or assignment of an option is not a transfer of rights (section 45(1ZD).

The rules in section 45A will not be amended, but will be kept under review.

Transfers of rights: scope and terminology

The draft legislation is considerably longer than the existing section 45. In part, this is because of the new minimum consideration rule and the denial of relief if the transfer of rights forms part of any tax avoidance arrangements.

However, the main reason for the increased length is that the legislation has been re-written with the aim of making it clearer (although it is doubtful that this has been achieved). This has been attempted by having separate provisions dealing with assignments from those dealing with other transfers of rights (essentially, sub-sales) and by defining terms, which were not expressly, or completely, defined in section 45, including:

"Transfer of rights": an assignment, sub-sale or other transaction that is entered into before the original contract is completed and, as a result of which, a person other than the original purchaser becomes entitled to call for the whole or part of the subject-matter of the original contract (section 45(1ZB)).
"Assignment of contractual rights": a transfer of rights under which the exercise of the right to call for a conveyance under the original contract is assigned (section 45(1ZC)).
"Transferee": the person entitled to call for a conveyance as a result of the transfer of rights (section 45(1ZE)(e)).
"Transferor": the person who disposes of, or agrees to dispose of, the rights as a result of which the transferee becomes entitled to call for a conveyance (section 45(1ZE)(f)).
"Original purchaser": the person who is to acquire a chargeable interest under the original contract (section 45(1ZE)(b)).
"Original contract": the contract for the acquisition of a chargeable interest by the original purchaser, which is to be completed by a conveyance (section 45(1ZE)(a)).
"Subject-matter of the original contract": the chargeable interest to be acquired under the original contract (section 45(1ZE)(c)).
"Subject-matter of the transfer of rights": the chargeable interest, the conveyance of which a person is entitled to call for as a result of the transfer of rights (section 45(1ZE)(d)).
"Part of the subject-matter of the original contract": a chargeable interest that is the same as the chargeable interest to be acquired under the original contract except that it relates to only part of the land (section 45(1ZF)(a)).
"Vendor": where the context permits, the vendor under the original contract or the transferor (section 45ZC(6)).

This approach is designed to address the criticism directed at section 45 that it is difficult to construe because:

It attempts to deal with assignments, sub-sales and other transactions even though, for example, sub-sales and assignments are inherently different transactions.
It is not always clear which of the parties in a transfer of rights the legislation is referring to.

However, despite the contrary suggestion in paragraph 20 of the explanatory notes, it is still not clear that the "vendor" is always the vendor under the A-B contract. This is important in practice not least because C must include the vendor's details in his SDLT return.

In the context of the assignment and sub-sale paradigms, B is the original purchaser and the transferor, and C is the transferee. The paradigms assume that there is only one transfer of rights. However, the draft legislation contemplates that there may be a series of transfers of rights, necessitating the elaborate definitions included in the draft legislation (for example, the original purchaser may be a different person to the transferor).

The paradigms also assume that the subject-matter of the original contract and the subject-matter of the transfer of rights are the same. Relief is available for a transfer of rights that concerns the same chargeable interest that is the subject-matter of the original contract even if it relates to only part of the land. However, relief is not available if the chargeable interest is different from the chargeable interest that is the subject-matter of the original contract. Therefore, if the A-B contract concerns the freehold in Blackacre, relief is not available if B grants a lease of Blackacre to C.

The transfer of rights provisions do not apply if paragraph 12B of Schedule 17A to the Finance Act 2003 (assignment of an agreement for lease) applies (paragraph 2(6), draft Schedule to Finance Bill 2013).

Assignments

If there has been an assignment of contractual rights (assignment), C is treated as the purchaser under the land transaction resulting from C substantially performing, or C taking a conveyance on completion of, the A-B contract (section 45ZB). There is a dedicated definition of "substantial performance by the transferee" (C) for the purposes of the assignment provisions. Essentially, it is the same as the familiar definition (see SDLT and contracts for the transfer of land: What is substantial performance?), but whether a substantial amount of the consideration is paid or provided is expressly tested by reference to consideration provided by C or a person connected with C (section 45ZB(1) and (6)). (If the A-B contract is substantially performed by another (say, B), the usual definition applies (section 45ZB(7)).

A person is not regarded as entering into a land transaction by reason of a transfer of rights (section 45ZA). Typically, the effective date of the A-B contract will be completion by transfer to C, but if the A-B contract is substantially performed by C before completion, this will trigger an effective date (sections 44 and 45ZB(2) and (3)).

The chargeable consideration is any consideration given:

Directly or indirectly by C or a person connected with C in respect of the subject-matter of the A-B contract.
By C for the assignment.

(Section 45ZB(4) and (5).)

If section 45ZB applies to treat C as the purchaser under the A-B contract, B is also treated as entering into a "notional land transaction" as purchaser (section 45ZC(1) and (2)). The chargeable consideration is any consideration given (directly or indirectly) by any person in respect of the subject-matter of the original contract (section 45ZC(3)). The effective date coincides with the effective date for C's acquisition (section 45ZC(1) and (2)).

If there is a series of assignments, a notional land transaction arises in respect of each assignment (section 45ZC (4) and (5)).

The assignment is "exempt from charge" (also called a "relief", which must be claimed) if all of the following apply:

The A-B contract had not been substantially performed before the assignment.
B is treated as the purchaser under the notional contract as a result of substantial performance or completion of the A-B contract.
The land transaction resulting from substantial performance or completion of the A-B contract is exempt under section 71A to 73 of the Finance Act 2003 (alternative finance arrangements).

(Section 45ZH(1) and (3).)

Sub-sales (and other transactions)

The draft legislation introduces the term "free-standing transfer of rights", which is a transfer of rights other than an assignment (section 45ZE(1)). Given that a "transfer of rights" envisages not only assignments and sub-sales, but also "other transactions" (within the meaning of a transfer of rights), a free-standing transfer of rights would include sub-sales and other transactions. However, apart from assignments, relief is only available if there has been a sub-sale (section 45ZI(1)). It is unclear why it would not have been possible to ditch the "transfer of rights" term and, instead, refer to assignments and sub-sales throughout the draft legislation. It remains to be seen what impact this draft legislation has on "other transactions".

In addition to defining free-standing transfers of rights, section 45ZE specifies that the consideration for C's acquisition includes any consideration given for the transfer of rights.

The A-B land transaction is "exempt from charge" (also called a "relief", which must be claimed) if all of the following apply:

The B-C contract is a sub-sale (described as a "qualifying sub-sale" for no obvious reason).
The A-B contract had not been substantially performed before the B-C contract was entered into.
Absent this exemption, B would be liable to SDLT on the A-B transaction.
Completion or substantial performance of the B-C contract takes place at the same time as, and in connection with, the earlier of substantial performance, or completion, of the A-B contract.
The B-C land transaction is not exempt under section 71A to 73 of the Finance Act 2003 (alternative finance arrangements).

(Section 45ZI(1), (2), (5)-(8).)

There are provisions to cater for sub-sales of part (section 45ZI(3) and (4)) and a series of sub-sales (section 45ZJ).

Tax avoidance arrangements

In the case of an assignment, the notional land transaction will not be exempt, and in the case of a sub-sale, the A-B land transaction will not be exempt, if the assignment or sub-sale (as the case may be) forms part of any "tax avoidance arrangements" (section 45ZK(1)).

Arrangements are ""tax avoidance arrangements"" if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage for any person was (one of) the main purpose(s) of B in entering into the arrangements (section 45ZK(2)).

A " tax advantage" is any of the following:

A relief from tax or increased relief from tax.
A repayment of tax or increased repayment of tax.
The avoidance or reduction of a charge to tax.
The avoidance of a possible assessment to tax.

(Section 45ZK(3).)

In addition, it is expressly stated that the minimum consideration rule is not to be taken as narrowing the scope of section 75A (section 45ZK(5)).

Comment

An air of surrealism surrounds this draft legislation. Section 45 was criticised when it was first introduced because its language introduced uncertainty given that the same framework applied to sub-sales, assignments and "other transactions", which were inherently different, and that fundamental terms such as "vendor" (to be read, where the context requires, as referring to either the vendor under the original contract or the transferor!), "original purchaser", "transferor" and "transferee" were not adequately defined. That was over nine years ago. We have started to get some cases coming through that inform our understanding of the meaning of section 45 (and there are likely to be more). HMRC has been aware for some time of the wide-spread reliance on section 45 in aggressive tax avoidance schemes (see SDLT avoidance). Section 75A was introduced for transactions taking effect from December 2006 and the general anti-abuse rule, which will apply to SDLT, is scheduled to take effect later this year (see Legal update, General anti-abuse rule (GAAR): response document, draft Finance Bill 2013 provisions and draft guidance).

Yet despite all of this, now is thought to be the right time to introduce a highly complicated re-write of the transfer of rights provisions which will apply, not only to those engaged in constructing and implementing tax avoidance schemes, but also to those simply wishing to conduct their commercial activities with a minimum of fuss.

Given HMRC's view that none of the transfer of rights schemes work, especially since the introduction of section 75A, a better approach may have been to identify and amend the defects in the existing legislation. Instead, we have a complete re-write, but with the existing legislation used as a template for the re-write, introducing changes the significance of which is not always or altogether clear. For example, it is clear that relief is not to be given if the transfer of rights is an "other transaction" such as a distribution in specie (which has been used in some tax avoidance schemes). However, the draft legislation retains "other transactions" within the transfer of rights definition, but relief is given only for assignments and sub-sales. It is not clear why it is thought necessary to retain the "transfer of rights" term rather than craft the legislation so as to apply only to assignments and sub-sales. The draft legislation does not even address all the known defects in the existing legislation; for example, the partial definition of "vendor" is retained rather than making it clear that it is A.

It is also far from clear why both the minimum consideration rule and the TAAR is required. The minimum consideration rule is understandable; however, the complete denial of relief if there are tax avoidance arrangements is a severe approach. That said, the government is continuing to consult on the TAAR (see paragraph 4.9 of the response document) and it is to be hoped that it will recognise that it is unnecessary.

Sources

HMRC: Stamp duty land tax: Transfers of rights and High-risk areas of the tax code: The Stamp Duty Land Tax "transfer of rights" or "subsale" rules.

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SDLT transfer of rights: draft Finance Bill 2013 | Practical Law