Legislation will be introduced in Finance Bill 2011 to make three changes to ensure or put beyond doubt that certain stamp duty land tax avoidance schemes are ineffective. The changes affect:
- the relationship between the rules on sub-sales and the Alternative Finance reliefs;
- the definition of a ‘financial institution’ for the purposes of the SDLT Alternative Finance reliefs; and
- the way the consideration is determined where land is exchanged.
The first measure renders ineffective schemes that employ the combination of a sub-sale and alternative finance reliefs. Currently, as you know, where a sub-sale is structured correctly the transaction between A and B is ignored and SDLT is chargeable if at all on the acquisition by C, who acquires the property under the sub-sale, only. So schemes had been structured whereby B (a private individual) sub-sold to C (typically a Channel Island protected cell company), which was constituted as a financial institution such that it could benefit from alternative finance relief. These schemes were widely sold although there are technical arguments to the effect that they did not work. The position is now put beyond doubt because the sub-sale provisions will from tomorrow specify that this treatment is not available where they are combined with the Alternative Finance reliefs in a way which would remove any SDLT charge on the purchase of an interest in land by B, i.e. where the acquisition by C is an exempt sale to a financial institution.
In respect of the second measure, "financial institution" includes banks, building societies and insurance companies. An additional way to qualify as a ‘financial institution’ is to hold a Consumer Credit Licence. From tomorrow, to prevent abuse, it will no longer be possible to qualify as a ‘financial institution’ just by holding a Consumer Credit Licence.
Regarding the third measure, where a major interest in land is exchanged for another interest in land, the chargeable consideration is determined by the market value of the interest acquired. From tomorrow the chargeable consideration will be changed to be the greater of (a) the market value of the interest acquired, and (b) what the chargeable consideration would be under the normal rules for consideration. The change to these rules ensures that SDLT avoidance will not be possible by the manipulation of the market value of the interest acquired.
Very broadly, the new rules come into effect at the beginning of 24 March 2011 except that arrangements entered into earlier fall under the old rules unless they are altered after commencement.
Relief for bulk residential purchases
A new relief for bulk purchases of residential property will be introduced with effect from Royal Assent. Instead of the rate of SDLT being determined by looking at the aggregate consideration provided for numerous, linked residential transactions, it will be determined by the mean consideration, i.e. by the aggregate consideration divided by the number of dwellings (subject to a minimum rate of 1 per cent). For the purposes of the relief, the dwellings will be treated as residential property, however many dwellings are involved (currently the acquisition of six dwellings or more is not treated as residential).
The relief’s purpose is said to be to promote institutional investment in the private rented sector. Accordingly HMRC has confirmed that the relief will not cover transfers of interests in dwellings which are themselves subject to a lease of 21 years or more, where such lease is not transferred in the same or a linked transaction.
The exact scope of the relief is as yet unclear and we await draft legislation; will it apply to long leases that have less than 21 years left to run, will there be an express requirement for the property to be let on short leases?