Notwithstanding the introduction of a general anti-avoidance rule in 2006, opportunities to avoid SDLT continue. To counter this three changes are announced:
Sub-sales Where the sub-sale provisions apply there is normally a single charge, payable by the sub-purchaser. However, if the sub-sale rules apply and the sub-purchaser can take advantage of an exemption then no charge arises. This analysis is at the heart of avoidance using alternative finance. Far from being reserved for the highest value transactions on a bespoke basis such structures risked becoming commonplace in relation to higher value residential conveyancing. In practice this was commonly achieved by having a normal acquisition contract in favour of the purchaser, who in turn agrees to a sale and leaseback with a “financial institution”. This second transaction is exempt, by combining it as part of a sub-sale the entire arrangement is then anticipated to be exempt.
The vendor would not know, the downside for the purchaser comprise fees (which might be a percentage of the anticipated savings) and the risk that HMRC would not accept the position. Litigation on such structures is understood to be in hand, but the general perception amongst practitioners is that HMRC have been slow to counter this avoidance. The draft legislation released today prevents it by excluding all alternative property finance reliefs from the the sub-sale rules. It remains to be seen whether pre-Budget planning is effective (I suspect that only a small proportion of cases are being contested), HMRC’s note states that the changes “ensure or put beyond doubt that certain SDLT avoidance schemes are ineffective” so presumably HMRC will continue to litigate.
Alternative finance and meaning of “financial institution” Holders of Consumer Credit Licences are to be excluded from the definition of financial institution and so will not be able to benefit from the alternative finance exemption. In practice it was relatively straightforward to obtain such a licence and hence access relief, including relief in conjunction with sub-sales.
Market value rule An exchange of land (involving a major interest) triggers a charge by reference to market value. The proposed change involves taking the higher of the market value of the interest acquired and the chargeable consideration given for it.
It is difficult to criticise any of the above, although I wonder whether the new market value rule might have unintended consequences.
The changes are effective from tomorrow subject to the usual grand-fathering.