Summary and implications

The advantages of using a virtual assignment are:

  • It can be drafted to be commercially equivalent to an actual assignment
  • Virtual assignments can be quicker to effect as they do not require consent
  • There is no parting of possession or occupation on a virtual assignment
  • There will be no SDLT to pay

However, it should be noted that the tax treatment of a virtual assignment is not identical to an actual assignment: capital allowances cannot pass and there may be VAT leakage. The following article explains more and gives full details of two recent cases ....

Background

A "virtual assignment" is a contractual arrangement under which all the economic benefits and burdens of a lease, including management responsibilities, are transferred to a third party without the assignment of the leasehold interest. Despite the existence of a virtual assignment arrangement, there is no actual change in the occupancy of the premises. However, the commercial consequences are the same as an actual assignment.

Recently virtual assignments have become a fairly common device:

  • to remove lease liabilities from a company's balance sheet and transfer the risks to a third party;
  • in large portfolio transactions where otherwise it would take a prohibitively long time to obtain consents for an actual assignment; and
  • where it is considered unlikely that a landlord would consent to an assignment to the intended assignee.

If a virtual assignment is not expressly prohibited, a standard alienation clause in a lease will not prevent a virtual assignment without a landlord's permission.

Case Law

Two prominent cases have tested the treatment of virtual assignments.

In Revenue and Customs v Abbey National Plc [2006] EWCA Civ 886, Abbey entered into virtual assignments to effectively sell and leaseback a number of properties. Abbey remained in occupation and paid a fee equivalent to the rent it would have paid on a leaseback. Abbey argued that the arrangement was exempt from VAT as it was tantamount to a right to occupation. However, the Court of Appeal held that no proprietary interest was transferred and that the virtual assignments were contractual arrangements "effectively merely to regulate… Abbey's exercise of its continuing right to occupy the properties".

In Clarence House v National Westminster Bank Plc [2009] EWCA 1311, NatWest entered into a virtual assignment in respect of let properties issuing a power of attorney to the virtual assignee to act on its behalf. The Court of Appeal did not consider that this breached the standard form alienation covenant not to part with or share possession of the premises. The court held that, although a virtual assignment imitated the economic effect of an assignment, no proprietary right or interest in the premises was transferred. Nor did NatWest part with possession of the premises as the arrangement was one of agency.

Tax Analysis

Direct Tax

The direct tax treatment of a virtual assignment has not been tested by case law. However, it is most likely that a lump sum paid in respect of a virtual assignment by the virtual assignee would constitute consideration for a disposal by the virtual assignor for chargeable gains purposes. The direct tax treatment would therefore be similar to an actual assignment.

Capital Allowances

As there is no transfer of ownership under a virtual assignment, capital allowances remain with the "virtual assignor". Under an actual assignment capital allowances can be transferred to the assignee.

Value Added Tax

The Abbey case decided that payments under a virtual assignment arrangement are standard rated for VAT purposes. This means that unless the virtual assignee is a fully taxable person it will not be able to recover all the VAT paid under a virtual assignment.

In contrast, payments under an actual assignment will only be standard rated if the assignor has opted to tax the relevant property.

Stamp Duty Land Tax

As there is no actual assignment of a chargeable interest in land, the virtual assignee has no SDLT liability on consideration paid under the virtual assignment.