Retrospective changes to the SDLT subsale rules

As part of its anti-avoidance strategy the Government has today announced the introduction of amendments to the SDLT legislation to counteract two SDLT avoidance schemes, mostly used in respect of residential property, which sought to take advantage of the SDLT subsale rules.

The SDLT subsale rules address the situation where, broadly, a person enters into a contract to acquire land (the “original purchaser”) and then enters into a further agreement before completion that will result in a different person acquiring the land instead.  Provided the original contract and the subsale are completed or substantially performed simultaneously, SDLT is only payable by the ultimate purchaser.

Legislation will be introduced in the Finance Bill 2013 which will apply with retrospective effect to subsales which were substantially performed (which would be the case if more than 90% of the consideration was paid) on or after 21 March 2012, but not completed.  Broadly, the changes will mean that the subsale rules do not apply and so SDLT will be payable by the original purchaser, if, notwithstanding the substantial performance of the subsale, the original purchaser or a person connected to him remains in possession of the land and one of the main purposes for the subsale was to avoid tax.  The original purchaser will be required to file an SDLT return and pay the SDLT by 30 September 2013.

This is the first example of the Government following up on the warning by the Chancellor in last year’s Budget that retrospective legislation would be used to curb SDLT avoidance where necessary.  HMRC state they do not regard the schemes as working but interestingly still felt the need to introduce targeted anti-avoidance legislation to put this beyond doubt.

These changes will only apply to subsales substantially performed before the Finance Bill 2013 receives Royal Assent, at which point they will be superseded by another set of amendments to the subsale rules on which HMRC have previously consulted and released draft legislation, details of which are summarised below.

New subsale rules to apply from Royal Assent of Finance Bill 2013

The proposed new legislation will introduce a minimum consideration rule for transactions where the original purchaser and ultimate purchaser are connected or act on non-arm’s length terms, to ensure the full price paid to the seller, under the original contract, or the price paid for the subsale if higher, is charged to SDLT.

The legislation will also change the way the original contract is regarded for SDLT purposes so that the original purchaser will need to file an SDLT return and make a claim for subsale relief (previously the orginal purchaser’s acquisition was wholly disregarded for SDLT purposes and so no SDLT return or claim for relief was needed).  In addition, the legislation will be amended to prevent the original purchaser claiming subsale relief where there is a tax avoidance motive.

Although these changes are not intended to have a substantive impact on ordinary commercial transactions, they will, at the very least, increase the compliance burden on intermediary purchasers.  In particular, it will become even more important for intermediary purchasers to take proper advice to ensure that their claim for relief is successful.  The draft legislation which was previously published was fraught with difficulties; it appears that the Government may have taken into account the representations made in response to the consultation on the draft legislation as the Budget documents confirm that further changes have been made to improve its clarity and structure and address a number of technical issues.  This revised legislation will presumably be published in the Finance Bill next week.

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