Disadvantaged areas relief

Some significant measures affecting commercial property transactions were
unveiled on Budget day this week. While the residential property sector may
have been
quietly rejoicing over the increase in the exempt threshold to £120,000,
commercial property interests were less happy to learn that disadvantaged
areas relief, under Schedule 6 of the Finance Act 2003, was to be withdrawn
that very day, although it will still apply to residential land transactions
of up to £150,000.

Although in general, transactions with an effective date after 16 March
2005 will no longer be eligible for the relief, there is a transitional
eligibility
for the completion or substantial performance of contracts entered into
on or before 16 March, subject of course to there being no variation or assignation
of the contract or sub-sale of the property concerned. The transitional
saving
will not apply where the transaction relates to the exercise of an option
or a right of pre-emption.

Anti avoidance provisions

These measures affect a number of avoidance schemes which have used reliefs
and other transaction structures to avoid liability to SDLT. In particular
they include provisions affecting the use of group relief or the use
of acquisition relief (under Parts 1 and 3 of Schedule 7 of the Finance
Act 2003), sale
and lease-back transactions, the use of sub-sale relief in alternative
finance transactions, and certain partnership transfers. There are
also
measures
that
affect the grant of new leases by bare trustees to their principal, certain
variations of leases, and the rules on contingent consideration in the
form of loans or deposits.

These provisions also take effect from 17 March 2005 and apply to land
transactions with an effective date of 17 March 2005, or later. Again
there are transitional
arrangements which mean that they will not apply to land transactions
in implement of a binding contract entered into on or before midnight
on 16
March, unless
there is a variation of, or an assignation of rights under the contract
after that date, and again the transitional saving does not apply to
transactions in exercise of any option, right of pre-emption or similar
right.

Group relief

Where, within three years of the transfer, the transferee company stops
being a member of the same group as the transferor company, group relief
can be
clawed back, although there are exceptions where this will not be applied.
The new provisions will affect, in particular, multiple inter-group
transfers designed to take advantage of the exceptions, by providing
that in addition,
in a chain of group transfers for example, group relief claimed by
the transferee company will be clawed back if the company is not in a group
relationship
with any of the previous transferors in the group which transferred
the
property, within three years of the change of control and a claim for
group relief
was
made at the time.

Acquisition relief

This relief applies where a company acquires all or part of the "undertaking" of
another company under certain conditions which include the issue
of shares in the acquiring company. SDLT at the reduced rate of ½ %
applies. This relief has been used in situations where the "undertaking" consisted
of let property, and was used as a structure for the sale of that
let property. The new provisions will specify that for the relief to apply
the "undertaking" concerned
must be a trade, and specifically cannot be a trade which relates
entirely or predominantly to land transactions.

Sale and lease-back

This relief provides that the sale element will be subject to SDLT
but the lease-back element will not, provided certain conditions
are met.
An additional
rule will apply to the method of reaching the value of the sale
element of a sale (or lease) and lease-back transaction. The charge is
calculated
by
reference to the market value of the heritable interest or the
head lease interest, as
encumbered by the lease. From now on the effect of the lease on
market value will be ignored.

Sub-sale relief in alternative finance transactions

Amendments to the sub-sale relief provisions have been made in
the past to regulate the relationship between sub-sale relief
and group
company
and sale-and-leaseback
reliefs. This current change relates to the connection between
the provisions relating to sub-sale relief and the relief given
in situations
where
land is sold to a financial institution and sold back to the
seller. Where the
seller
in these circumstances benefits from "second transaction" relief,
sub-sale relief is not available.

Partnership transactions

The measures provide that where land is transferred into a partnership
and the partner who transfers that land takes money out of
the partnership within
three years, a charge will arise.

The Inland Revenue has produced
Budget Notes on these and other changes introduced this week that affect
tax matters. The Budget Notes on disadvantaged areas
relief and the anti-avoidance measures are available from the Inland Revenue
website at:
http://www.inlandrevenue.gov.uk/budget2005/revbn09.htm
and
http://www.inlandrevenue.gov.uk/budget2005/revbn36.htm

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