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HMRC SDLT: Example 9: Land Acquisition by Connected Company with Market Value Considerations

Understanding Acquisition by a Connected Company

Overview of the Transaction

In this example, we have three parties involved: A, B, and C.

– A is the original owner of a piece of land.
– B enters into a sale and purchase agreement with A to buy the land for £1 million, which is its market value.
– The completion of the sale occurs two years after the agreement was made.

After one year, the situation changes:

– The market value of the land has now increased to £1.1 million.
– B then enters into a subsale agreement with C, another company, agreeing to sell the land for £900,000.

It is important to note that C is connected to B, which means that both companies work closely together.

Completion of Agreements

Both the agreement between A and B, and the subsale agreement between B and C are completed at the same time and are linked to one another. This means the two transactions are interrelated, influencing how tax is calculated.

B’s Position

B is responsible for paying tax on the acquisition of the land. In this case, B can claim relief, which may reduce the amount of tax owed. The relief could be related to different factors, such as previous property ownership or potential future developments.

C’s Position

C is also responsible for paying tax on its acquisition of the land. To determine how much tax C needs to pay, we look at the chargeable consideration.

– According to paragraph 9, as it connects to paragraph 1 of Schedule 4, the chargeable consideration for C’s acquisition is £900,000.

Understanding Chargeable Consideration

Chargeable consideration refers to the amount that is considered for tax purposes when property is acquired. The law has specific rules on how this is determined:

1. Normal Rules: Since the purchase between B and C was completed for £900,000, this would typically be the amount considered for tax purposes.

2. Deemed Market Value Rule: Section 53 outlines this rule, which could otherwise increase the taxable amount based on market value rather than the transaction value. However, in this case, since A is the seller to C, the deemed market value rule does not apply. Therefore, the chargeable consideration for C does not increase to £1.1 million, even though that is the current market value.

Connected Companies and Minimum Consideration Rule

Since B and C are connected companies, another rule comes into play: the minimum consideration rule. This rule states that when companies are connected, the chargeable consideration must be adjusted to reflect a minimum amount.

In this situation:

– The payment for the land disagreement between B and C initially set at £900,000 is not sufficient given the connection between the two companies.
– The minimum consideration rule applies, increasing the chargeable amount to £1 million for C’s acquisition.

This means that while C intended to pay £900,000, for tax purposes, the value is adjusted to align with the original agreement’s market value of £1 million due to their connected status.

Implications for B and C

The implications of these rules are essential for both B and C.

– B: B can benefit from any reliefs available on their original acquisition, making their tax position potentially more favourable.

– C: C, however, faces a higher chargeable consideration than initially expected. This means C’s tax liability could increase significantly due to being part of a partnership with B.

C might need to prepare for the additional financial burden associated with the tax implications of the increased chargeable consideration.

Conclusion

In summary, this scenario illustrates how connected companies handle land acquisitions and the importance of understanding how different rules apply based on the relationships and transactions involved. B’s sale and the subsequent agreement with C highlight the impact of market value changes and how connected companies can influence chargeable considerations.

It is vital for businesses to consult legal or tax professionals to navigate these complexities effectively, ensuring they understand their obligations and potential tax relief opportunities in property transactions.