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Changes to stamp duty land tax sub-sale rules will affect commercial transactions, said expert

Out-Law News | 11 Dec 2012 | 5:00 pm | 5 min. read

Changes to the stamp duty land tax (SDLT) sub-sale rules announced as part of the draft Finance Bill "will introduce complexity and uncertainty into commercial transactions" said John Christian, a property tax expert at Pinsent Masons, the law firm behind Out-law.com.

The stamp duty land tax (SDLT) rules for sub-sales  or transfers of rights transfers of rights are being reformed "to minimise arguments that they can be used for SDLT avoidance" according to HM Revenue & Customs (HMRC) and draft Finance Bill 2013 legislation which has been published.

In a typical transfer of rights, a person (the original vendor) enters into an agreement with the ‘transferor’ for the sale and purchase of UK land which is to be completed by a conveyance. The transferor then enters into another transaction (the transfer of rights) with another person (the transferee) as a result of which the transferee can call for a conveyance of that land. Under the current law the transferee is charged tax on a single land transaction which is an amalgam of the transfer of rights and the ultimate acquisition of the land. Any acquisition by the transferor is disregarded and the transferor does not have to make a land transaction return, as long as the transaction is completed at the same time and in connection with the acquisition by the transferee.

Under the new rules the transferor will be regarded as making an acquisition for SDLT purposes and will need to make a return. The transferor will be able to claim full relief against any SDLT in "normal cases" where it assigns its rights or enters into a sub-sale transaction "with no SDLT avoidance purpose."

"The introduction of a tax avoidance test will be particularly difficult to operate as the test requires the original buyer to be able to show that no other party to the arrangements had a tax avoidance motive." said Christian.

A minimum consideration rule will also be introduced for transactions where the transferor and transferee are connected or act on non-arm’s length terms.

"Sub-sale relief is relied on in many straightforward commercial transactions, including by house builders and in development joint ventures" said John Christian. "It is important that those that may be affected by the changes review them and provide feedback on the issues that will arise in practice.”

The changes are being made because the sub--sale rules have been used in many SDLT avoidance schemes. However HMRC point out in the response to the consultation that it does not accept that any of the schemes involving the transfer of rights rules work as claimed. It believes that "they misinterpret the transfer of rights rules" and that the SDLT anti avoidance rules in section 75A Finance Act 2003 applies to them.

HMRC has also announced that the SDLT rules on abnormal rent increases will be abolished and changes in the Finance Bill 2013 will simplify the reporting requirements where a lease continues after the expiry of its fixed term or an agreement for lease is substantially performed before the actual lease is granted. This follows an informal consultation that HMRC held following the 2012 budget.

The abnormal rent increase rules impose an additional SDLT charge where there is a rent increase after the first five years of the term of a lease and this increase is 'abnormal'. An increase is abnormal if the rent doubles, or more than doubles, after the fifth year.

The amendments will have effect on and after the date on which Finance Bill 2013 receives royal assent. The abolition of the rules on abnormal rent increases will apply to any increases on or after that date.

It was also confirmed that real estate investment trusts (REITs) will no longer have to pay corporation tax on the income they derive from investing in other REITs.

Currently the income generated in such circumstances is treated as income from property which is subject to the main rate of corporation tax in the hands of the investor REIT. This makes it unattractive for a REIT to invest in another REIT.

John Christian said that the changes in the rules "should enable REITs to diversify their risk and facilitate REIT joint ventures."

REITs are tax efficient property investment companies. They were first developed in the US but were introduced in the UK in 2007. The REITs regime moves the taxation on a property rental business from the REIT to the investor in the REIT.

The Treasury published a consultation document on the proposal in April this year. In its consultation the Treasury admitted the proposals would amount to a fundamental change to policy because it would mean moving away from limiting REIT activity to direct investment in property. However the change will bring the UK tax regime for REITs more in step with other countries' REITs regimes.

The same consultation document also looked at the potential role REITs could play to support the social housing sector.  However, in the Treasury's response to the consultation it was confirmed that the Government has decided not to amend the regime for social housing at this stage.  The document states that "for some stakeholders the changes to the REITs regime in Finance Act 2012 were sufficient to enable them to set up a social housing REIT. However for those who did not feel social housing REITs were a viable option, further additional changes to the REITs regime would be unlikely to make difference to their thinking."

"It is surprising that the Government have not accepted the incompatibility of the REIT regime with residential assets" said John Christian. "A social housing REIT was always unlikely because of the yields available but a bigger issue for the sector is the fact that the REIT rules do not work with the residential business model an this is proving an obstacle to the use of REITs in the private rented sector.”

Further Finance Bill legislation will limit the availability of lease premium relief where leases are of more than 50 years duration.

Lease premium relief was identified by the Office of Tax Simplification (OTS) as an area which should be reviewed. The OTS recommended that the tax treatment should follow the accounts if the regime were to be simplified or abolished.  In April HMRC issued an informal consultation paper on reform of lease premium relief.   Currently, on leases granted for a term of 50 years or less (short leases) 2% of the premium for each year by which the term, minus one year, falls short of 50 is treated as income in the recipient's hands in the year of receipt. However, the tax relief for the payer of the premium is spread over the term of the lease

There are special rules for determining the duration of a lease, which operate to treat a lease of over 50 years (long lease) as a short lease if its terms, or other circumstances, make it likely that it will be terminated earlier. The Finance Bill change means that relief will no longer be available to a trader or intermediate landlord that pays a lease premium on a lease that is only deemed to be short because of these special rules.

HMRC stated that the measure is "designed to simplify a complex element of the lease premium rules and protect tax revenue."

An annual tax on company-owned residential properties valued at over £2 million will come into force on 1 April next year, with the first payments due in October, the Government has also confirmed.

The new annual residential property tax (ARPT) is one of several measures, announced earlier this year, aimed at ensuring people who purchase high value residential properties in the name of a company, partnership or other 'non-natural person' pay their "fair share" of tax. Dwellings purchased as part of a genuine property rental business, held for charitable purposes or run as a commercial business will be entitled to claim a relief from ARPT on an annual basis.

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