The government moved very swiftly in the pre-Budget report on 6 December 2006 to block (with immediate effect) a number of stamp duty land tax schemes involving the use of partnerships, leases and sub-sales. However, rather than just specifically targeting these schemes, the government took the opportunity to introduce a wide-ranging anti-avoidance measure (s75A of the Finance Act 2003) which could potentially have a significant effect not only on less aggressive but also on wholly ‘innocent’ property structures.

Partnership planning

There were a number of SDLT schemes in circulation which relied upon exploiting the SDLT regime for partnerships.

Most of these structures revolved around the way in which SDLT was calculated on the transfer of a property into a partnership. Broadly, as long as one of the partners was a non-corporate, the proportionate partnership shares of the transferor and partners connected with the transferor would be disregarded in assessing the SDLT payable.

These schemes have now been blocked with immediate effect, unless they were effected pursuant to pre-2pm 6 December contracts which are not subsequently varied.

The relevant changes will apply to all property holding partnerships, even if not set up for SDLT planning purposes. In broad terms, these changes are as follows:

(1) Where a property is transferred into a partnership, SDLT relief is no longer available in respect of partnership shares held by corporate partners connected with the transferor unless the conditions for group relief are satisfied. Accordingly, there must be no arrangements to sell any group partner. Also, the anti-avoidance provisions contained in the group relief rules apply so that the relief would not be available unless the transaction took place for bona fide commercial reasons and not for the avoidance of SDLT, income tax, corporation tax or CGT. Finally, even if these hurdles are met, any sale of a group partner within three years would trigger a clawback.

(2) Where a corporate body acquires an interest in a partnership or increases an existing interest and no consideration passes, it will be treated for SDLT purposes as though it has paid the market value of a proportionate part of the property interests it indirectly acquires. Further, if SDLT group relief is claimed in respect of this transaction then the legislation now clearly provides that the normal clawback provisions will apply if the partner leaves the group within three years.

(3) Where a property is transferred out of a partnership, no SDLT relief will be available in respect of transfers to companies connected with the partners. Unlike on a transfer into a partnership, no group relief will be available on this transfer.

General anti-avoidance

In contrast to the partnership structures, the lease and sub-sale schemes were targeted with more wide-ranging general anti-avoidance rules: s75A. Again, this will apply unless the transaction takes place pursuant to a pre-2pm 6 December contract which is not then varied.

Unfortunately, however, s75A is likely to have a much wider effect than just closing down the examples of structures set out in the accompanying technical note. In brief, the new offending provision applies where:

• there is a disposal of land by a person (V) and another person (P) acquires it (or an interest deriving from it);

• there are a number of connected or ‘scheme’ transactions; and

• the total SDLT payable is less than would have been payable on a notional sale from V to P.

If these conditions are met then SDLT is imposed as though there is a notional sale from V to P and as though this sale takes place on the following basis:

• it is for the highest amount or aggregate amount (the legislation does not specify which), given or received by any one person in respect of the scheme transactions; and

• as though any scheme transaction which is a land transaction is ignored.

It is possible to assess the effect of this by illustrating it with one of the structures s75A was intended to block. A common structure involved the acquisition by an unlimited company of a property from a third party which would then sub-sell the property by way of a distribution to its parent company. Value would pass from the unlimited company to the seller but it was thought that this would be ignored under the SDLT sub-sale provisions and that only the transaction between the unlimited company and its parent would be taken into account. Because that transaction took place for no consideration, and because (as a distribution) it was outside the rules which treat transfers to connected companies as taking place at market value, it was generally thought that no SDLT would be payable on the transaction.

In applying s75A, though, the structure loses its effectiveness on two separate levels because:

(1) the seller is treated as V and the parent company is treated as P so that the sub-sale rules no longer apply and the parent company is chargeable to SDLT on the price paid by its subsidiary (as this is a consideration paid by a person connected with the purchaser); and

(2) the parent company is treated as though it pays the highest amount, or aggregate amount, provided or received by any person under the scheme transactions, so that the price paid by the subsidiary under the initial leg of the sub-sale (which would be a scheme transaction for these purposes) would be treated as paid by the parent company.

Areas of concern

Unfortunately, the potential scope of s75A is actually much wider than it first appears. One of the main reasons for this lies in the way in which the third test is assessed (ie that the total SDLT payable is less than would be payable on a notional sale from V to P). This is because, in assessing the SDLT payable under that notional sale, P is required to look at the consideration passing for the other scheme transactions and to take the largest amount or aggregate amount given or received by any one person in respect of those transactions.

Further, there is no purpose test for the application of this provision. The only requirement is effectively that the other transactions (to be scheme transactions) must be ‘involved in connection with’ the acquisition by P of its land interest from V. The application of the provision therefore largely revolves around the interpretation of this ambiguous phrase. Given a wide meaning, nonsensical consequences could follow. For instance, in a typical ‘Prudential’ structure where land is acquired and construction subsequently takes place, is the construction expenditure ‘involved in connection with’ the land acquisition? The result would be that the aggregate paid for both the land and construction would be treated as chargeable consideration for the land for SDLT purposes.

Even aside from this, there is yet more ambiguity involved in deciding whether the consideration passing under the notional V to P land transaction is taken to be the largest amount passing under any of the scheme transactions or whether it is actually the aggregate amount under all of the scheme transactions. The legislation appears to leave it entirely open which of these alternatives is adopted.

Are there any limits?

It seems the main limit to the application of s75A is largely dependent on the width of the phrase ‘involved in connection with’ and, leaving aside the white list (discussed in more detail below), the key to interpreting this provision could be in seeking parallels with clearly absurd possibilities. As such, it is likely a court would adopt a very narrow view of the phrase, possibly requiring the scheme transactions to be transactions which somehow effect the passing of the property interest but in a way that minimises the SDLT payable.

There is some support for this in the enacting provision (paragraph 2 of the Stamp Duty Land Tax (Variation of the Finance Act 2003) Regulations 2006). This provides that s75A will have effect in relation to ‘land transactions which are scheme transactions’. As such, this could be seen as requiring that, to be a scheme transaction, it is necessary that the other transaction somehow effects the transmission, collapsing or continued existence of a land interest. It is also notable that the examples of scheme transactions set out in s75A(3) are all property transactions of one kind or another.

On the other hand, though, s75A(2) seems to envisage scheme transactions as including non-land transactions. Whether this is only intended to make clear that scheme transactions will encompass land transactions falling outside the definition used in the SDLT legislation is not clear.

White list

As with the wide SDLT Disclosure Regulations, the width of s75A means that it is likely to catch innocent or normal transactions. It would be surprising if HMRC intended taxpayers always to pay the maximum conceivable tax that could be due.

In the case of the Disclosure Regulations, HMRC sought to allay fears of excessively wide legislation not by amending the legislation but by introducing a ‘white list’ of excluded circumstances. HMRC has now followed the same approach (at least by way of interim guidance pending the Finance Act 2007) by producing another white list for s75A.

In the white list HMRC sets out the types of transactions it does not consider to be scheme transactions. These can then be disregarded in applying s75A. For example, HMRC states that the construction contract entered into as part of a genuine ‘Prudential’ structure is not a scheme transaction. As a result, it is clear that the value passing for the construction contract is not treated as chargeable consideration under s75A. Similarly, HMRC states that related non-land transactions will not be treated as scheme transactions where the SDLT legislation requires a reasonable apportionment between the land and non-land elements in any event. While the statement is helpful, the result is not at all clear from the legislation itself.

At the time of writing, the full copy of the white list can be found on the HMRC website.

Conclusion

Although few SDLT or property professionals would seek to defend the artificial planning the pre-Budget SDLT legislation was seeking to stop, the way in which that legislation was introduced is open to criticism. As I have explained above, it is impossible, on the face of the legislation, to be able to decide with any certainty whether a number of common transactions come within it.

The fact that HMRC has produced some interim guidance is undeniably helpful and is certainly welcomed. However, if there is to be wide antiavoidance legislation then the property industry should at least obtain clear HMRC guidance that gives some certainty as to the SDLT implications of standard transactions with no tax-avoidance motive. Although the width of the Disclosure Regulations gave rise to a similar lack of clarity, advisers could at least just disclose if in doubt. Then the only cost would be the time and inconvenience of submitting the disclosure. In relation to the pre-Budget anti-avoidance provisions, though, the potential additional SDLT cost could be significant enough to affect whether or not a transaction even goes ahead.

The phrase ‘taxed by law and untaxed by concession’ has now become a cliché but this is down to the growing relevance of the phrase. The pre-Budget anti-avoidance provision is yet another example of what seems to be a growing trend. However, there are significant problems involved in this approach:

• The white list is HMRC guidance, not legislation, so if the transaction does not comfortably fit within the white list then it is not possible to advise with any certainty as to the tax consequences of the transaction.

• The white list is not scrutinised by parliament so it could theoretically exclude transactions that parliament would not find particularly objectionable.

• In the case of s75A, the white list did not materialise until nearly two months after the provision was introduced. This meant there was a significant period of real uncertainty. Even now, it is only intended as interim guidance.

Fortunately, the changes to the partnership rules are much more focused. As such, they do not entail the same ambiguities. Nevertheless, the SDLT treatment of partnerships seems to be becoming increasingly complicated (including dangerous anomalies), so that any transactions affecting shares in a property partnership are now likely to trigger an SDLT cost and accompanying compliance responsibilities. This may affect the desirability of partnerships, LLPs and LPs as property investment or property development vehicles – especially when tax transparency can be achieved through the use of an offshore unit trust. Although SDLT would now be payable on the initial contribution of the property to the unit trust, existing units could be transferred and further units issued without any corresponding SDLT or stamp duty cost.