HMRC SDLT: SDLTM23015 – Reliefs: Group Tax Bulletin article: paragraph 2(1): arrangements for change of control of purchaser

Principles and Concepts of SDLTM23015

This section of the HMRC internal manual discusses the Group Tax Bulletin article, focusing on paragraph 2(1) concerning arrangements for the change of control of a purchaser. The page outlines key principles and concepts related to tax reliefs.

  • Explains the conditions under which tax reliefs apply during a change of control.
  • Details the procedural requirements for claiming such reliefs.
  • Provides guidance on compliance with HMRC regulations.
  • Highlights the importance of documentation and record-keeping.

Understanding Changes of Control and Group Relief for SDLT

When dealing with stamp duty land tax (SDLT), it is essential to understand the rules surrounding group relief, specifically the conditions outlined in SDLTM23015. This guide clarifies when group relief is denied and the implications of having arrangements that allow certain individuals or entities to take control of a purchaser company while excluding the vendor.

Key Principles of Group Relief

Paragraph 2(1) is a provision that prevents companies from claiming group relief if there are arrangements in place, prior to the transaction, allowing someone to gain control over the purchaser but not the vendor. Here’s what you should know:

  • Effective Date: The arrangements must exist at the effective date of the transaction.
  • Avoidance of SDLT: The main aim of paragraph 2(1) is to stop businesses from avoiding SDLT when transferring property or an economic interest out of the group.

Parliamentary Statements

A statement made by the Economic Secretary during a parliamentary debate on the equivalent stamp duty laws in the Finance Act 2000 remains relevant. He acknowledged concerns about blocking relief for transfers between group members when a company leaves the group. The Secretary said:

“I have received representations expressing concern about the blocking of relief for transfers from the company about to leave the group to another group member – in other words, when the company leaving the group is the transferor. I am persuaded that there are commercial situations in which an asset is transferred to another group company after arrangements are in place for the transferor company to leave the group. In a sense, therefore, the asset never leaves the original group. I am willing to make a concession for such cases, which will be useful to businesses, as their legal advisers have suggested.

I have some worry that it might be possible to construct avoidance devices from the concession, so I have asked the Stamp Office to monitor carefully the use of the relief. If the concession is abused, the Government will not hesitate to act swiftly.”

(see Hansard 18 July 2000, column 253)

HMRC will not dispute claims for group relief if the transferor company exits the group after transferring the land to other group members.

Conditions for Exemption from Paragraph 2(1)

In some cases, paragraph 2(1) does not apply if certain arrangements exist. These arrangements refer to the acquisition of shares by a company when it undergoes reconstruction, provided specific conditions are met:

  • The acquisition must qualify under section 75 FA 1986.
  • Conditions for relief under that section should be satisfied.
  • After the acquisition, the purchaser must remain part of the same group as the acquiring company.

Understanding Paragraph 2(2) of Schedule 7

Paragraph 2(2) deals with circumstances where relief can be denied based on arrangements involving consideration (payment or compensation) rendered to someone outside the group. Here are key points to consider:

  • Prohibition of Relief: Paragraph 2(2)(a) says relief for SDLT isn’t available if consideration is provided or received by someone other than a group company.
  • Evaluation of Claims: When claims for group relief are submitted, HMRC will examine the facts to determine whether paragraph 2(2)(a) affects the claim. If loan financing is part of a scheme to save SDLT while transferring property or an interest outside the group, relief may be denied.

Examples of Acceptable Claims

There are situations where claims for relief will continue to be valid under paragraph 2(2)(a). Some accepted conditions include:

  • If the claim is not followed by a sale or underlease outside the group.
  • If a sale or underlease occurs, but SDLT is paid by the purchaser at a value close to the market rate, then relief under paragraph 2(2)(a) is less likely to be denied.
  • Loans from commercial lenders on regular commercial terms intended to facilitate transfers between group members usually won’t invalidate a claim. For example:
    • A loan explicitly for buying an asset.
    • A loan secured against the asset being transferred.
    • Arrangements for replacing or novating an existing charge on the property transferred.

It is important to note that these allowances apply specifically to paragraph 2(2)(a) and do not automatically make the claim acceptable if other tests in paragraphs 1 and 2 of Schedule 7 are not met.

Enquiries by HMRC

If HMRC opens an enquiry into a claim, they will assess the specifics of the situation. Here are examples of circumstances that may prompt a closer examination:

  • The claim is accompanied by the creation or transfer of loan stock or equity capital.
  • There is a capital reorganisation of the company that received the asset.
  • A guarantee is provided by a third party that isn’t associated with the group.
  • A new charge or financial arrangement is created where ownership of the property may vest in the lender, rather than satisfying the debt.
  • The freehold reversion or an intra-group lease is assigned to someone outside the group.

Indications of Inadmissibility

HMRC may also view certain situations as indicators that a claim should be denied. These include:

  • If some or all of the payment for the transaction remains unpaid or is represented by intra-group debt, this may suggest an attempt to lower the transferee company’s value for potential future sales outside the group.
  • If existing shareholders of the transferee include stakeholders outside the group and the transaction leads to a dividend payment or the liquidation of the transferee.

Understanding the implications of these paragraphs and conditions is essential for businesses involved in transfers that might attract SDLT. Ensuring compliance with these regulations can help businesses avoid penalties and ensure valid claims for group relief.

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Written by Land Tax Expert Nick Garner.
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