LBTT Guidance: No Relief for Bonds if Holder Controls Asset

When AFIB Relief Is Lost Because a Bond-Holder Controls the Property

AFIB relief under Schedule 8 to the Land and Buildings Transaction Tax (Scotland) Act 2013 can be denied or later withdrawn if a bond-holder, or a connected group of bond-holders, gains enough rights to manage and control the underlying property to the exclusion of other holders. The key issues are whether control rights exist, who holds them, and when that control is acquired.

• Relief may be lost on the first or second AFIB transaction if one bond-holder, or connected holders acting together, acquires control of the underlying asset.
• Control exists where the bond rights include management and control of the asset, and those rights can be exercised to the exclusion of other bond-holders.
• If control is acquired within 30 days of the effective date of the first transaction, relief for that first transaction is not available; if acquired later, earlier relief may be withdrawn.
• A limited exception may apply if the holders did not know, and had no reason to suspect, that they had gained exclusive control and they transfer enough rights away as soon as reasonably practicable after becoming aware.
• Another narrow exception may apply where a holder underwrites a public offer of bond rights but does not exercise management and control rights over the asset.
• In practice, the bond documents, voting rights, side agreements and the combined position of connected persons all need careful review.

Scroll down for the full analysis.

When AFIB relief is lost because a bond-holder gains control of the property

This page explains an important limit on Land and Buildings Transaction Tax relief for alternative finance investment bonds (AFIBs). The relief can fail, or be withdrawn later, if a bond-holder or a connected group of bond-holders gains control of the underlying asset. In practice, this rule is aimed at cases where the bond structure stops looking like a broad investment arrangement and starts looking as though one holder, or a connected group, can control the property.

What this rule is about

Schedule 8 to the Land and Buildings Transaction Tax (Scotland) Act 2013 contains relief for certain transactions involving alternative finance investment bonds. Broadly, that relief can apply to the first and second transactions within the AFIB structure.

The rule discussed here sets a boundary to that relief. It asks whether a bond-holder, or a group of connected bond-holders, has acquired control of the underlying asset. If they have, AFIB relief may not be available.

This matters because AFIB relief is designed for a particular type of investment bond arrangement. Where one holder, or a connected group, can manage and control the bond assets to the exclusion of others, the legislation treats that as significant enough to deny the relief unless a specific exception applies.

What the official source says

The official guidance says AFIB relief is not available on the first or second transaction if control of the underlying asset is acquired by either:

• a bond-holder, or
• a group of connected bond-holders.

A bond-holder or connected group acquires control of the underlying asset if two conditions are met:

• the rights under the bond include a right of management and control of the assets, and
• the holder, or the connected group acting jointly, acquires enough rights to exercise that management and control to the exclusion of any other bond-holders.

The timing matters.

• If control is acquired within 30 days of the effective date of the first transaction, relief for the first transaction is not available.
• If control is acquired after that 30-day period, relief for the first transaction is treated as withdrawn, provided conditions A to C are met under paragraph 24 of schedule 8.

The source also identifies two situations where relief can still remain available even though control has been acquired.

The first is an unknowing acquisition followed by prompt correction. Relief may still be available if:

• when the rights were acquired, the bond-holder or all connected bond-holders did not know and had no reason to suspect that the acquisition gave them the ability to exercise management and control to the exclusion of others, and
• once they become aware of that position, sufficient rights are transferred away as soon as reasonably practicable so that exclusive control is no longer possible.

The second is underwriting a public offer of rights under the bond. Relief may still be available where the bond-holder:

• underwrites a public offer of rights under the bond, and
• does not exercise the right of management and control of the bond asset.

For this purpose, to underwrite means agreeing to make capital payments under the bond if other persons do not make those payments.

What this means in practice

The practical question is not simply whether a bond-holder has a large economic interest. The rule focuses on control rights over the underlying asset.

You need to look at what rights exist under the bond and whether one holder, or a connected group, can actually use those rights to manage and control the asset while excluding other bond-holders.

If that level of control exists from the outset, or is obtained within 30 days of the first transaction’s effective date, the relief for the first transaction is unavailable. If that level of control arises later, the relief can be clawed back rather than merely denied from the start.

The mention of the second transaction in the guidance means the control issue can affect relief across the AFIB structure, not just at entry. Anyone reviewing an AFIB arrangement should therefore consider ownership and control rights throughout the life of the bond, not only on day one.

The connected persons point is also important. A person may not hold enough rights alone, but may do so together with connected bond-holders. The legislation therefore looks through fragmentation of rights where connected parties can act jointly.

How to analyse it

A sensible way to analyse this issue is to work through the following questions.

• Is the arrangement one for which AFIB relief would otherwise be in point under schedule 8?
• What are the rights attached to the bond? Do they include rights of management and control over the underlying asset?
• Who holds those rights in practice?
• Does a single bond-holder, or a group of connected bond-holders, hold enough rights to exercise management and control to the exclusion of all other bond-holders?
• If yes, when was that control acquired: within 30 days of the effective date of the first transaction, or later?
• If control was acquired, does either statutory saving apply?
• If relying on the first saving, is there evidence that the holders did not know and had no reason to suspect they had acquired exclusive control, and that they transferred rights away as soon as reasonably practicable once aware?
• If relying on the underwriting saving, was there genuinely an underwriting of a public offer of rights, and did the underwriter refrain from exercising management and control rights?

In practice, this means checking the bond documents, subscription terms, side agreements, voting arrangements, and any rights that can be exercised jointly by connected holders.

Example

Illustration: a property is held as the underlying asset in an AFIB structure. The bond terms give holders rights to direct management decisions about that property. One investor and two connected companies acquire enough rights between them to direct those decisions without needing agreement from any other bond-holders.

If they acquire that level of control within 30 days of the effective date of the first transaction, AFIB relief for that first transaction is not available.

If they only acquire that level of control later, the earlier relief may be withdrawn, assuming the statutory conditions for withdrawal are met.

But if they acquired those rights without knowing, and without reason to suspect, that the rights gave them exclusive control, and they then transfer enough rights away as soon as reasonably practicable after becoming aware, the relief may still be preserved.

Why this can be difficult in practice

The difficult part is often deciding whether the rights amount to management and control of the asset, and whether they can be exercised to the exclusion of other bond-holders. That is a legal and factual question. It may depend on the detailed drafting of the bond terms and on how rights can be exercised in combination.

The connected persons rule adds another layer of complexity. Rights that appear harmless when viewed holder by holder may create control when the positions of connected holders are aggregated.

The first saving is also fact-sensitive. It is not enough simply to say that the holders did not realise the effect of the rights. The test in the guidance is stricter: they must not have known and must have had no reason to suspect. There must also be a prompt transfer of sufficient rights once awareness arises. What counts as “as soon as reasonably practicable” will depend on the facts.

The underwriting exception is narrow. It does not protect a holder who underwrites and then actually exercises the management and control rights. The source makes clear that both elements matter.

Key takeaways

• AFIB relief can fail if a bond-holder, or connected group of bond-holders, gains enough rights to control the underlying asset to the exclusion of others.
• The timing of when control is acquired matters: within 30 days relief may be unavailable; later, earlier relief may be withdrawn.
• There are limited exceptions for unknowing acquisition corrected promptly and for certain underwriting cases where control rights are not exercised.

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