Clause 193 - Pre-completion transactions

Part of Finance Bill – in a Public Bill Committee am 2:30 pm ar 18 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of David Gauke David Gauke The Exchequer Secretary 2:30, 18 Mehefin 2013

Clause 193 will reform an area of the stamp duty land tax code that has been the subject of extensive attempted avoidance. It will apply to transactions that are currently known as transfer of rights, which will in future be called pre-completion transactions.  The new rules are designed to replicate the tax outcome of the current rules for commercial transactions, but to be robust against attempted abuse.

The transfer of rights rules cover situations in which someone enters into a contract to acquire land and then enters into a further agreement before completing the purchase—either to sell on the land, or to sell their rights to the land. The rules determine how much tax the final purchaser should pay and allow the initial purchaser to disregard the acquisition if certain conditions are met.

Over a number of years, there have been repeated attempts to devise SDLT avoidance schemes using the transfer of rights rules. Such attempted abuse has continued in the face of several small legislative changes to put beyond doubt that such schemes do not work. At Budget 2012, the Chancellor therefore made it clear that continued attempted abuse would not be tolerated. Among other things, he announced that HMRC would consult on reforming the transfer of rights rules, and the clause and the schedule are the outcome of that consultation.

Clause 193 will introduce a new set of rules for pre-completion transactions, replacing and superseding the current rules for the transfer of rights. Although the new rules are similar in scope to the old ones, they contain three major differences. First, the initial purchaser will no longer be able simply to disregard the initial transaction; instead, the initial purchaser will have to claim relief in a normal land transaction return. The relief will be available only for pre-completion transactions that are sub-sales or assignments.

Secondly, relief for the initial purchaser will be subject to an avoidance purpose test. Relief will not be available when the pre-completion transaction forms part of arrangements for avoiding tax. Thirdly, the ultimate purchaser will be subject to a minimum consideration rule if they are connected with, or not acting at arm’s length from, the initial purchaser, which will ensure that the ultimate purchaser is charged an appropriate amount of tax.

The hon. Member for Newcastle upon Tyne North raised concerns about the length and complexity of the legislation. It would be fair to say that there can sometimes be a tension in tax law between brevity and clarity. We have sought to make the legislation as clear as possible, although I accept that that has been at the expense of brevity. Part of the problem is that the current legislation applies the same rules to a number of different types of transaction. That makes the legislation succinct, but its brevity has led to the perceived lack of clarity that I mentioned.

In the public consultation on the revision of the rules, there were calls for the types of transaction to be differentiated and the tax treatment to be made clearer. We therefore decided to unpack the different transactional processes and to show the tax impact at each stage. The unpacking of the creation of deemed transactions added to the complexity, which had previously been avoided by a complete disregard of the first transaction. The level of attempted abuse meant that the disregard could no longer be retained. The legislation became more complex to ensure that all intermediate transactions were catered for when they had previously been disregarded.

The hon. Lady also asked about guidance. HMRC has issued draft guidance that includes examples of how a range of scenarios should be treated. That guidance covers common and straightforward situations, as well as some more complex ones. HMRC has invited comments on how the guidance can be extended and improved in the run-up to the new rules coming into effect, and that guidance will ultimately be included in HMRC’s SDLT manual. I hope that that provides hon. Members with all the information required.

The measure forms part of the Government’s actions to make sure that purchasers of land pay their fair share of tax. It is designed to make it clear that this aspect of the SDLT rules cannot be abused to avoid tax.