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So long to sub-sale relief?

For years, sub-sale relief has allowed many to minimise double charges to SDLT, and for others it has offered a convenient way to make substantial SDLT savings on transactions that, in all other guises, would be tantamount to a tax avoidance scheme. With this latter group in mind, changes have been brought in under the Finance Act 2013 (FA 2013) to arm Her Majesty’s Revenue and Customs (HMRC) with a new set of powers to stamp out abuse of the system.

Transfer of rights

In its simplest form, a sub-sale or a ‘transfer of rights’, as it is termed under the SDLT rules, occurs when A contracts to sell some land to B and, before that transaction completes, B enters into an arrangement whereby C acquires the land in question.

This outcome can be achieved in a number of ways; for example, B may assign the benefit of its contract to C, or A may transfer the land to B, who immediately transfers it to C. Strictly speaking, each of these transactions could give rise to two SDLT charges. However, this would amount to a double taxation burden and therefore, by virtue of the sub-sale relief rules, B, the middle-man, as it were, is relieved of its obligation to pay SDLT.

The key driver behind sub-sale relief is the desire to ensure that in circumstances where, for genuine commercial reasons, a property transaction happens in stages, SDLT is only paid once, on the full amount paid for the property by the entity that ultimately acquires it. However, having recognised that the sub-sale relief regime offers an expedient way to make substantial SDLT savings, and in some instances, avoid SDLT altogether, many people have been promoting the introduction of a sub-sale into a transaction for the sole purpose of reducing, or avoiding, a charge to SDLT. It is such ‘contrived’ transactions that the FA 2013 seeks to combat, so as to ensure that only those transactions that happen in stages for bona-fide commercial reasons benefit from sub-sale relief.

The new rules

On 17 July 2013, the FA 2013 received Royal Assent and ushered in a whole host of new rules for those hoping to claim sub-sale relief. The first change to note is that sub-sales are now called ‘pre-completion transactions’ and that the new rules differentiate between two types of such pre-completion transactions. Those two types of transactions are:

  • an assignment of a land purchase contract (save for the assignment of an agreement for lease)
  • everything else (described by the new rules as a ‘free-standing transfer’).

While the new rules seek to distinguish between the two types of pre-completion transaction, this distinction has left the spirit of the old sub-sale relief regime in tact: the middle-man (B) is still relieved of its duty to pay SDLT. So far, nothing much appears to have changed; however, the key change is that B will now be required to file an SDLT return and make a formal claim for sub-sale relief. The rationale behind this being that sub-sale transactions will be brought to the attention of HMRC, which should facilitate the exposure of those ‘contrived’ transactions which seek to exploit the system.

The new rules go further than simply imposing a requirement on parties involved in staged property transactions to file an SDLT return; they also allow HMRC to deny relief in circumstances where it would be reasonable to conclude that the main reason, or one of the main reasons, for entering into a transaction was in order to secure a tax advantage for the intermediate purchaser or anyone else. Furthermore, the FA 2013 seeks to bolster existing general anti-avoidance provisions by introducing a general anti-abuse rule which will allow HMRC to challenge SDLT avoidance.

As a final point to note, special rules have also been introduced which will apply to transactions where B and C are connected to each other. This is to combat those not-so-rare cases where the B to C transaction is undertaken at a much lower price than would be generally expected, with the real price being paid by B to A, but funded by C.

What does it mean in practice?

In practice, the new rules should make it more difficult for those hoping to introduce sub-sales into a transaction for the sole purpose of gaining a tax advantage, but for those in genuine commercially motivated staged property transactions, nothing much should change. Of course, B will now have to file an SDLT return and claim relief, the downside of which is that there is an increased compliance burden on B; however, many will agree that this is a small price to pay if it ensures the preservation of sub-sale relief.