What is Stamp Duty Land Tax (SDLT)?
Stamp Duty Land Tax is a tax on land transactions. SDLT must be paid if you buy a property of land at a certain price in England and Northern Ireland. The basic threshold for SDLT is £250,000. This means that SDLT is not applied if the value of property in transaction is less than £250,000.
What is an SDLT Group Relief?
Corporation tax group relief, which can also be understood as ‘Group exemption’ allows companies to transfer any part of a current year trading loss of one such group company to set off against any part of another company’s taxable total profit of a corresponding accounting period. Set off of loss from one group company to another is one Group Relief; other reliefs from corporation tax, capital gain tax, and income tax are also allowed under Group relief.
For Stamp Duty Land Tax (SDLT) as per SDLTM23010,’Group relief’ is when there is an exemption from tax on a sale or other transfer of property by one group company to another. This relief allows land and building to be transferred between two companies of the same group without any charge to SDLT. ‘Reconstruction relief’ as per SDLTM23200 on the other hand is an exemption from tax for no-change-in-ultimate-ownership cases and ‘acquisition relief’, a special rate of 0.5 percent for partition of trading companies are available. The basic rule is that an acquisition of property is wholly exempt from SDLT if the vendor and the purchaser are at the effective date companies in the same group.
Conditions for availing the SDLT Group Relief Claim
A transaction will qualify for the SDLT group relief if both the seller and the buyer (in the case of land transfers) or the lessor and the lessee (in the case of grants or assignments of leases) are both members of the same group of companies, at the effective date of the transaction (usually the date of completion).
The buyer and the seller will be members of the same group of companies if:
- One owns at least 75% of the share capital of the other, or
- A third company owns at least 75% of the share capital of both buyer and seller.
Example:
A Ltd owns 90% of the ordinary share capital of B Ltd and B Ltd owns 90% of the ordinary share capital of C ltd, even though in general law A ltd has no beneficial interest in the share of C ltd, A ltd is regarded as owning beneficially 90% x 90% = 81% of C ltd and A ltd, B ltd and C ltd would be part of a group entity.
There are further 4 main conditions that need to be complied with for SDLT Group Relief Claim:
- Either one of the companies must own beneficially, directly, or indirectly 75% or more of the ‘ordinary share capital’ of the other, or another company must own beneficially, directly, or indirectly. 75% or more of the ordinary share capital or both.
- The ownership must be of 75% or more of the real equity. Real equity is equity in substance rather than just in form. More of this explained below.No arrangement for purchaser to leave the group or other certain types must be in place.
- The transaction must be commercial in nature. Group relief is denied if the transaction is not affected for bona fide commercial reasons or forms part of arrangements of which the main purpose, or one of the main purposes is the avoidance of liability of tax.
- Tax here is not limited to SDLT but includes income tax, corporation tax, capital gain tax or stamp duty, though not VAT.
Definition of a Company for SDLT Group Relief Claim
- Must be a body corporate. This includes Limited Liability Partnership. (Refer special case for a limited Liability Partnership in case of SDLT).
- No rule that the companies must be incorporated or resident in the UK, or in the same country as each other.
What if the company goes into Liquidation?
The company going into liquidation loses the benefit of ownership of all its asset. Therefore, a parent company going into liquidation no longer beneficially owns its share in any of its subsidiaries resulting in the non-availability of SDLT group relief. This however does not apply if the company goes into administration.
A parent going into administration does not lose beneficial ownership of its assets; an inferior company’s going into liquidation or administration does not sever its group relationship with the companies above it.
Special case for a Limited Liability Partnership in case of SDLT group relief claim
After change in view from HMRC, Limited Liability Partnership is now accepted as a body with a separate legal entity. As LLP does not have an issued share capital, it cannot be a 75% subsidiary of another company. HMRC have taken the view that an LLP, as a body corporate, can be the ultimate parent of the group for this purpose. Therefore, transfer of shares made to the parent LLP from a subsidiary (in the same group) qualify for group relief and vice versa.
This view does not affect which party can claim group relief but does affect which entities are regarded as forming part of a group.
What is 75% or more of real equity?
75% or more of real equity test is important to avoid artificial group creation for claiming SDLT relief. This is based on the Principle of Substance over form.
Any company would own 75% of the ordinary share of another company by the nominal value whereas the real ordinary shares would be owned by others. To prevent this, there is a second test to the effect that ownership must also be of 75% or more of the equity in substance.
This is fairly complex and careful consideration must be taken when
- there are different classes of shares in the company or an intermediate company above or
- the company or the intermediate company above it in the group structure owes debt on a non-commercial loan unless the debt is owed to its suggested Parent.
The test of real equity must be such that it would receive 75% or more of both when
- some shares’ rights are such that equity holders’ rights would be different in the future, the calculation must also be done on the basis that the change of right has happened.
- If the changes are such that it is merely might take place, such as changes to the share capital if options are exercised, are ignored.
- Some shares have rights which are limited by reference to a specified amount or amounts, the calculation must also be done on the assumption that the shareholders in question have waived those (limited) rights, and the 75% test must be passed in all the calculations.
When is SDLT group relief not available or withdrawn?
The exemption of SDLT is not available if there are arrangements in existence such that a person has or ‘could obtain’ control of the purchaser company but not the vendor company.
Example:
If a transfer is to a company where there is an arrangement for the company to be sold to a buyer outside the group with the vendor remaining inside or if there is an arrangement for the purchaser to issue sufficient new shares to outsiders or to buy in sufficient shares from its parent, that its parent would lose control.
There are different other types of ‘could obtain’ arrangements due to which the group relief of Stamp Duty Land Tax will not be available. Tax experts at UK Property Accountants can carry out full assessment of the situation and assist you in providing the appropriate recommendation.
- Group relief may be withdrawn if the purchaser company ceases to be a group member within three years.
- There is also a clawback if the leaving of the group takes place after the three years but pursuant to, or in connection with, arrangements made before the end of the three years.
- More about this explained in ‘Triggering the Clawback’ below.
- The tax that would originally have been paid becomes chargeable and has to be paid within 30 days after the event which caused the withdrawal of the group relief.
- As discussed above, a vendor company going into administration and selling a property to its parent, the relief will not be available. This is based on the idea that no-one, or only the administrator controls a company in administration.
What is the procedure for SDLT Group relief claim?
Group relief is not given unless the purchasing company claims it. A purchaser claiming group relief puts in its land transaction return in the ordinary way. No documents are required to be submitted for claiming the Group Relief in Stamp Duty Land Tax. The claim should be made on form SDLT1, or electronic equivalent, using code 12.
Following procedure procedures for other returns within Stamp Duty Land Tax (SDLT) the revenue certificate (form SDLT5) that enables title to be registered will be issued provided that the land transaction return is completed. Certificates will not be delayed simply because HMRC may wish to enquire into particular aspects of the land transaction return including a claim to group relief.
The relief is self-assessed and will be dealt with on a ‘process now/check later’ basis along with all other SDLT matters. Under SDLT HMRC does not require the preparation and submission of the letter of claim covered in STSM042310.
This means that companies must judge the admissibility of the claim themselves. Under SDLT HMRC has the power to assess and collect under-declared tax and seek penalties in cases where errors in returns (including errors in group relief claims) are the result of negligence or fraud.
Triggering the Clawback of group relief claim
As explained earlier, if the purchaser leaves the group or certain other things happen, within 3 years, the relief is ‘withdrawn’. The basic rule is that the relief is clawed back if the purchaser ‘ceases to be a member of the same group’ as the vendor, within 3 years of the effective date of the intra-group transaction, if the purchaser or relevant associated company still owns the property.
Relevant Associate Company means a company which ceases to be a member of the same group as the vendor in consequence of the purchaser’s ceasing to be a member of that group. Accordingly for the purchaser to have pushed the property on to a subsidiary of its own does not avoid clawback.
Some of the illustration regarding the Clawback
Illustration 1:
A ltd, B Ltd and C Ltd are the part of the group ABC Ltd with A Ltd being the parent of both B Ltd and C Ltd. A Ltd transfer a property to B Ltd. Later, within 3 years, A Ltd sells the shares of C Ltd.
Here the clawback charge is not triggered as long as there is a 75% or more relationship between A Ltd and B Ltd. They are still the member of the same group.
Illustration 2:
A Ltd owns B Ltd and B Ltd owns C Ltd. A Ltd transfer a property to C and C transfers it to B. Group relief is claimed both the times. Later A Ltd sells B Ltd to an outside purchaser. B Ltd has no clawback as B Ltd has not left the BC group. On the other hand, C Ltd also does not have clawback because C Ltd no longer owns the property and B Ltd is not its ‘Relevant associate Company’ B is not leaving the group in consequence of C doing so.
Illustration 3:
A Ltd wholly owns X Ltd and B Ltd. X Ltd wholly owns C Ltd. C Ltd transfers the property to B Ltd. Within 3 years, A sells its share in X Ltd. B has ceased to be a member of the same group as C as they are no longer both 75% or more subsidiaries of A Ltd. There is no clawback in this case as parties ceases to be member of the same group but by virtue of vendor leaving the group instead of Purchases. This results in a loophole as A Ltd could, after selling its share in C Ltd or X Ltd, can sell B Ltd and still B Ltd could not have any clawback.
However, there is an anti-avoidance provision now which says that if after C Ltd is sold and there is a change in the ultimate control of B, B has a clawback charge after all. This is an exception of the normal clawback provision. This includes if A Ltd is sold which carries B Ltd with it, also includes if ultimate control of B is obtained by another person or persons, or B Ltd is wound up.
There are some exceptions to Clawback provision where vendor is wounded up or group ceases by virtue of mirror image reconstruction. These are fairly complicated and complex arrangements which has to be separately studied by complying with the provision. We at UKPA expertise in this and can provide you the most appropriate and suitable tax advice.
What is a SDLT Reconstruction Relief?
SDLT is not liable to be paid when the transfer forming part of certain company reconstructions. Reconstruction relief allows land and buildings to be transferred between two companies, as part of a transfer of an undertaking in exchange of shares without any change in ownership. Here ‘reconstruction’ does not necessarily have to be in legal form.
A company splitting its existing business is one of the ways of reconstruction. Reconstruction is when there is no change in the shareholders of both new company and old company. Here the old company does not have to be liquidate, the old company can simply distribute its assets and shares in the subsidiaries to a new company or the new company can in return issue shares to the shareholder of the old company. Any type of reconstruction can be carried out by a court approved scheme of arrangement.
One thing that is important to note during any reconstruction is if the group relief which was already been given is a clawed back.
What is an SDLT Acquisition Relief?
Acquisition Relief is available when there is a transfer of land in connection to acquisition of an undertaking. The rate of SDLT in this instance would be restricted to 0.5%.
For availing this relief, the old company must transfer all or part of it’s undertaking to an acquiring company. The primary activity of the undertaking or the part of undertaking being acquired has to be trading with a caveat that this relief is not available to land dealing trader.
What are the conditions to avail 0.5% SDLT on chargeable consideration?
- The consideration must include irredeemable shares issued by the new company to shareholders of the old company or to the old company itself and no more than 10% cash.
- The new company must not be associated with any third company which has arrangements with the old company concerting the new shares.
- The acquisition must be for bona fide commercial reasons and must not be part of the avoidance of liability to tax.
Clawback of SDLT reconstruction and acquisition relief
- If control of the acquiring company changes within 3 years of the transaction.
- If there is an arrangement put in place within that period which results in a change of control after the period of 3 years.
Exceptions to clawback of SDLT reconstruction and acquisition relief
- The control of the acquiring company changes as a result of a share transaction effected in accordance with divorce, separation, etc.
- Clawback is not triggered if the share transaction which would fall within the exemption for variations of wills.
- An exempt intra group transfer. However, there is still clawback if the company buying those shares is in the same group as the old company and later, within the original three year period, leaves it.
- A loan creditor or creditors ceasing to have control of the company and no other change in control occurs.
- A transfer of shares to another company in relation to which acquisition relief applies. Relief may be withdrawn following a subsequent non-exempt transfer.
SDLT Reconstruction and Acquisition relief claim procedure
The procedure of claiming any one of these relief is fairly simple. Followings are the procedures:
- The company trying to claim the relief should put in SDLT 1 in the ordinary way.
- Inserting the appropriate code at Q9.
- The company can positively explain things if it wants by writing to the Birmingham Stamp Office with a copy of the return.
