In the first of his latest two-part series on stamp duty land tax, Bill Chandler considers some of the idiosyncrasies that only arise on transactions involving companies.
At the heart of stamp duty land tax lies a deceptively simple concept. When you acquire an interest in land, you pay tax on the consideration you pay for that interest, whether by way of purchase price or rent. However, in an attempt to do justice to particular transactions and to prevent avoidance, an incredibly complicated regime has developed.
Several of the resulting quirks relate specifically to transactions involving companies.
Deemed market value
SDLT is usually calculated on the price actually paid. If the buyer gives no consideration for the transaction, there is no tax to pay. But in the magical world of SDLT, there are inevitably exceptions. Section 53 of the Finance Act 2003 is an important yet frequently overlooked provision. Where the buyer is a company that is connected with the seller, section 53 requires tax to be paid on the market value of the interest acquired, if that is higher than the actual consideration. This prevents the consideration being manipulated to reduce the tax bill.
Just to keep us all on our toes, section 53 does not apply on every transaction involving a connected company, but only to acquisitions by a connected company. It will therefore bite on transactions between group companies, and on the transfer by a director to their company, but it will not be triggered on a transfer from a company to its director.
In intra-group transactions, basing the tax on a market value that exceeds the price actually paid may ultimately make little difference. Group relief will usually be available to eliminate any tax liability. Technically, however, the correct treatment is to declare the higher market value figure and claim group relief. While no tax is payable immediately either way, claiming group relief raises the possibility of clawback in the future. And, of course, group relief won’t be available on every transaction affected by section 53, such as a transfer from an individual to their connected company.
Group relief
Group relief is much better known than section 53, but some of its intricacies are frequently misunderstood. Most real estate lawyers appreciate the basic notion that relief can be claimed on land transactions between companies where one company is a 75% subsidiary of the other, or both are 75% subsidiaries of a third company.
Perhaps less well known is that group relief is not limited to traditional companies and can also be available where other types of corporate body are involved. For example, a limited liability partnership cannot be a subsidiary, but it can be a parent for group relief purposes (although an LLP cannot itself claim group relief).
There is frequently even greater uncertainty surrounding the application of the rules concerning the subsequent withdrawal of group relief. While most people can remember the three-year limit, they often assume that clawback is payable if the property is disposed of within that period. In fact, clawback usually only applies if the purchaser company leaves the group within that period (or pursuant to arrangements made within that period), and only if it still holds an interest in the property.
Even if group relief is not withdrawn by a subsequent degrouping, it can still impact on future transactions. Group relief is one of several reliefs that, if claimed on the grant of a lease, can cause a future assignment of that lease to be taxed as if it was the grant of a new lease. This allows tax to be collected on rents, which might otherwise escape the net.
Residential property
Companies are also subject to special rules when it comes to the higher rates for additional residential properties, the so-called 3% surcharge for second homes.
Where companies are concerned, it doesn’t even need to be an additional property for the surcharge to apply. Virtually all purchases of residential property by companies are subject to the higher rates. This prevents the higher rates from being circumvented by establishing a portfolio of companies, each holding a single residential property.
And that’s if you’re lucky. The fear of expensive residential properties being “enveloped” has led to the concept of the “higher threshold interest”, whereby certain purchases of residential properties over £500,000 by companies are subject to SDLT at 15% on the entire purchase price. Enveloping is the holding of property in corporate vehicles, with subsequent disposals usually being effected by way of selling the company rather than the property itself. Share sales remain subject to good old-fashioned stamp duty, at the significantly lower rate of 0.5%.
Holding expensive residential property in companies can also attract the annual tax on enveloped dwellings (the dreaded ATED), but that’s quite another story.
Today’s lesson
For a variety of reasons, companies have attracted special treatment under the SDLT regime. Each of the points discussed above represents a departure from the basic principles of SDLT. And each of these exceptions from the general rule is subject to its own exceptions and conditions. You would be either a genius or a fool to believe that you understand every last foible. Whenever a land transaction involves a company, the trick is to always take the time and effort to analyse the situation fully and identify the correct SDLT treatment.
Bill Chandler is a professional support lawyer at Hill Dickinson LLP
