The Finance Bill 2013 provisions withdraw the exemption from SDLT for certain sub-sales back to 21st March 2012 and also contain what will become the new sub-sale rules from Royal Assent.
Here is a quick summary and my initial thoughts on the sub-sale provisions in the Finance Bill published on 28th March 2013.
Retrospectivity
Clause 192 of the Bill withdraws the disregard of the completion of the original contract in s45(3) FA 2003 (and therefore the justification for not having paid SDLT on it) for transfers of rights entered into since 21st March 2012 where:
(a) the “secondary” or sub-sale contract was substantially performed but not completed at the same time as completion of the original contract
(b) the original person or someone connected with him went into possession, and
(c) the main purpose or a main purpose of the original purchaser in entering into the sub-sale was to obtain a tax advantage.
The purpose of these provisions is to kill with retrospective effect a scheme that was in widespread use which enabled mainly residential purchasers to buy a property, become the registered owner and live in it while at the same time having contracted to sub-sell it into a family settlement on deferred completion terms and thereby obtain the benefit of the disregard for SDLT of the completion of the original contract. The sub-sale leg of the transaction paid no SDLT because the market value consideration was normally below the threshold.
Any responsible tax scheme provider who offered this scheme will have given clear warnings to users about the Chancellor’s threat of retrospective changes to block SDLT schemes contained in 2.199 of the Budget Report 2012 so that clients will have given informed consent to proceed with the scheme. Clients should also have been informed that any insurance they may have taken out was on terns that it would not pay out in the case of retrospective legislation. There seems to be little point in disputing the use of retrospective legislation here: see Huitson [2011] STC 1860 and also the ECJ’s decision in “Stichting “Goed Wonen” [2005] Case C-376/02.
What is important now is for scheme providers to look after their clients and inform them of the 30th September 2013 deadline for paying the SDLT now due plus interest if penalties are to be avoided. I have already been advising professional clients in terms of preparing the necessary written advice and guidance to affected user clients. Professional clients may also wish to offer their clients an “un-wind” solution to extract the property from the structure which often involved two settlements or companies having an interest in the property. Now that the tax reason for maintaining the structure has gone its continued existence may give rise to unnecessary tax liabilities and also complicate any future sale of the property.
One issue that arises from the terms of the retrospective legislative provisions is that they potentially catch certain developer sub-sale structures where the sub-purchaser developer has substantially performed his sub-sale contract but not completed it and is intending either to procure that the original vendor or purchaser convey direct to customers or to complete and convey himself. In the absence of SDLT very few structures would be done using a sub-sale and developers would simply take a conveyance and then sell on in due course. The reason for using a sub-sale is of course to obtain the SDLT saving available to the original purchaser. Hence it would seem that a main purpose or even the main purpose of such sub-sale arrangements is the obtain of a tax advantage for the original purchaser. Care should therefore be taken to ensure that the original purchaser does not remain in possession at any time after the sub-sale and some form of reassurance for “commercial” sub-sale structures may therefore be needed.
The new sub-sale rules
These new rules are to be contained in a new Schedule 2A to FA 2003. The provisions run to 16 pages and are a feast of mechanistic “paint-by-numbers” prescriptive legislative drafting. The mistrust of taxpayers and the insecurity is painfully evident from the tortuous trail the reader must follow in understanding the provisions. They are such that a suitable app might be written so that the poor conveyancers who have to operate this obsessive/compulsive style of drafting and ensure that their clients obtain the relief can put the basic information about their transaction into their smartphone and get a yes or no to sub-sale relief (in the case of a no with guidance on how to get to a yes). Actually, by way of consolation once one has sat down with a cold-towel wrapped around one’s forehead and spent some time with the provisions they do not seem as terrible as at first sight. But then again one should not really have to do that to understand the application of what is meant to be a simple levy on sales of land.
Schemers will be challenged by two provisions. First, the minimum consideration rule in para 12 which applies when the parties are connected or are not dealing at arm’s length. This should not trouble the experienced schemer too much and a work-around will probably emerge in due course. Second, the anti-avoidance rule in para 18 will deny the relief (which must now be claimed via a return rather than being automatic) when effectively the obtaining of the sub-sale relief was a main purpose of the original purchaser entering into the arrangements. This is a curious provision which potentially denies the relief in almost any sub-sale and no doubt something can be made of this. What these rules plus of course s75A and the new GAAR will do in my view will be to make SDLT planning more of a bespoke science in future and reduce considerably the scope for marketed SDLT avoidance schemes no doubt to HMRC’s relief.
