Pre-completion transaction rules (commonly referred to as subsale relief)

The SDLT pre-completion transaction regime is complex in order to reduce the opportunity to use the rules to avoid SDLT.

There are two forms of pre-completion transactions:

1. Assignments of rights (AOR)
2. Free standing transfers (FST).

AOR

An AOR is, broadly speaking, a transaction where the original buyer under an uncompleted contract assigns the rights to that contract to another party. The original buyer under the contract would, in the absence of relief, be liable to SDLT based on a notional land transaction as if the original buyer had completed the contract. In such a situation, the original buyer can claim relief on the SDLT arising in respect of the notional land transaction provided they satisfy the following conditions:

1. The original buyer would, in the absence of relief, be liable to SDLT on completion of the notional land transaction.
2. There has been no substantial performance (please see below) of the original contract when the AOR is completed.
3. Specific reliefs relating to alternative property finance do not apply to the transaction resulting from the AOR.
4. Relief is claimed in the relevant SDLT return.

By way of brief example: a housing developer (the original purchaser) entered into a contract to purchase bare commercial land with the benefit of planning permission for some residential dwellings for £5m (the original contract). However, following exchange of that contract the original purchaser decides to proceed with an alternative project that will demand sole focus, and they therefore need to find an alternative purchaser to take on the original contract. If they were to simply complete the original contract and then look to sell on the land, they would suffer a £239,500 SDLT charge. Instead, they decide to assign the benefit of the original contract to an unconnected third-party developer at arm’s length (the assignee) for £500,000. The original contract has not been substantially performed when it is assigned, and the assignee then proceeds to complete it following the assignment. The assignee will suffer an SDLT charge based on £5.5m (being the consideration due under the original contract plus the assignment fee paid). The original purchaser will also need to submit an SDLT return and, assuming that all the conditions set out above are satisfied, claim relief.

FST

Conversely, under an FST, the contract completes, but the property that is the subject matter of that original contract is then immediately sub-sold by the original buyer to the ultimate purchaser. The party seeking relief must satisfy the following conditions:

1. There is a “qualifying subsale” which, broadly, means there is a subsale contract relating to some or all of the land being sold under the original contract.
2. The original buyer relief would, in the absence of relief, be liable to SDLT on completion of their original contract.
3. The qualifying subsale must take place at the same time and in connection with performance of the original contact.
4. The original contract must not have been substantially performed (please see below) when the qualifying sub-sale is entered into.
5. Specific reliefs relating to alternative property finance do not apply to the transaction resulting from the AOR.
6. Relief is claimed in the relevant SDLT return.

By way of brief example: as above, but the original purchaser enters into an arm’s length subsale contract with the unconnected third-party developer (the ultimate purchaser) for £5.5m. The original purchaser completes the original contract and, simultaneously and in connection with that completion, completes the subsale contract with the ultimate purchaser. Assuming all conditions above are satisfied, the ultimate purchaser will suffer an SDLT charge based on £5.5m (being the consideration due under the subsale contract). The original purchaser will also need to submit an SDLT return but should be able to claim subsale relief.

What does substantial performance mean for SDLT?

Substantial performance is a key concept for parties seeking to rely on pre-completion transaction relief (either AOR or FST). Very broadly, a contract is substantially performed when the purchaser: (i) takes possession of the whole, or substantially the whole, of the land; or (ii) pays a substantial amount of the consideration. Therefore, if it is planned that any money is paid, or occupation of any part of the land is taken (either by the purchaser or by a party on behalf of the purchaser) prior to completion of any AOR or FST, then we would recommend advice is taken to ensure that the relief is not compromised.

Anti-avoidance

Even if the conditions for pre-completion transaction relief (either AOR or FST) are satisfied, any party thinking of claiming pre-completion transaction relief should consider the various anti-avoidance rules that might result in relief being unavailable.

Minimum consideration rule

The minimum consideration rule will only be applicable where the ultimate buyer in a pre-completion transaction is either not acting at arm’s length or is connected with the party claiming pre-completion transaction relief. It operates to ensure that the ultimate buyer’s SDLT liability is, at the very minimum, based on the amount due to be paid by the original buyer pursuant to the original contract.

We would recommend specialist advice is taken if you are concerned the minimum consideration rule might apply to your arrangements. 

Targeted anti-avoidance rule (TAAR)

Pre-completion transaction relief will not be available where the structure forms part of tax avoidance arrangements. The full factual background should be considered and, if it can be reasonably concluded that the obtaining of a tax advantage (by any person) was a main purpose of entering into the structure, pre-completion transaction relief will not be available. Again, advice should be taken if this is a concern.

Section 75A

The SDLT code contains broad anti-avoidance rules that can apply, very broadly speaking, where an additional step is added to a transaction and the result is that less SDLT is paid (even if there is no tax avoidance motive). Parties should therefore be cautious is a subsale step is introduced to arrangements and, as a result, less SDLT is paid than would otherwise have been due.

Conclusion

Pre-completion transaction relief can be a useful tool to mitigate SDLT  that would otherwise be incurred by purchasers who have no intention of retaining the land in question. However, various conditions must be satisfied, and anti-avoidance rules should be considered prior to claiming relief. If you are considering entering into a subsale arrangement and need specialist advice, please contact a member of the Birketts Corporate Tax team.