Technical Guidance on Land Transaction Tax Relief for Alternative Finance Bonds

LTT Relief for Alternative Finance Investment Bonds in Wales

This relief can stop Land Transaction Tax being charged on certain property transfers used in an alternative finance investment bond structure. It mainly covers the transfer of land to the bond-issuer and the transfer back at the end, but only if strict legal, timing and control conditions are met throughout the life of the arrangement.

• The relief is aimed at bond structures where land is transferred to a bond-issuer, leased back to the person raising finance, and later transferred back to the original owner.
• The first transfer can qualify for relief early if the basic conditions are met within 30 days, but that relief can later be withdrawn if the full rules are not satisfied.
• Key conditions include registering a legal charge in favour of the WRA within 120 days, keeping the land as a bond asset, making enough capital payments, and transferring the land back on time.
• The transfer back must usually take place within 30 days after the land stops being a bond asset and no later than 10 years after the first transfer.
• Relief may be denied or withdrawn if a bond-holder, or connected bond-holders, gains effective control of the underlying land, except in limited statutory exceptions.
• If the original bond asset is replaced with other land, relief can continue only if the replacement meets the statutory conditions and value requirements.

Scroll down for the full analysis.

LTT relief for alternative finance investment bonds: when transfers into and out of the bond structure can be relieved

This page explains a specialist Land Transaction Tax relief in Schedule 11 to the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act, as described in Welsh Revenue Authority technical guidance. The relief is designed to stop LTT arising simply because an alternative finance bond structure uses land in a way that a conventional interest-bearing bond would not. It matters because the structure can involve more than one land transaction, and without relief there could be tax charges on transfers that are mainly part of the financing mechanics rather than a true change of economic ownership.

What this rule is about

An alternative finance investment bond can be used to raise finance without paying interest in the conventional way. Instead, the return to bond-holders may come from rents or other profits generated by an underlying asset.

Where the underlying asset is land, the financing usually requires the landowner to transfer the property to the bond-issuer. The bond-issuer then grants a lease back to the person seeking finance, and when the bond ends the property is transferred back.

That creates three land transactions:

• the original transfer of the land to the bond-issuer
• the leaseback from the bond-issuer to the person seeking finance
• the transfer back to the original owner when the bond ends

The relief is aimed at the first and third of those transactions. The leaseback is dealt with separately, and the guidance notes that sale and leaseback relief may apply to that leaseback leg.

What the official source says

The guidance says the relief exists so that land transactions required by alternative finance investment bonds do not suffer LTT where equivalent conventional bond funding would not require those land transfers.

For this purpose:

• an “alternative finance investment bond” means arrangements to which section 564G of the Income Tax Act 2007 applies
• “arrangements” is defined widely and can include agreements, understandings, schemes, transactions or a series of transactions, whether or not legally enforceable
• a “qualifying interest” means a major interest in land, other than a lease of 21 years or less

The guidance also states that a bond-holder is generally not treated as having an interest in the bond assets, and the bond-issuer is not treated as trustee of those assets. That matters because the relief can be denied if a bond-holder, or a connected group of bond-holders, acquires control of the underlying asset.

There are seven statutory conditions for the relief structure to work:

• the person seeking finance and the bond-issuer must enter into arrangements under which a qualifying interest in land is transferred to the bond-issuer, with agreement that it will be transferred back when it stops being held as a bond asset
• the bond-issuer must enter into an alternative finance investment bond, before or after the first transaction, and the land must be held as a bond asset
• there must be a leaseback arrangement under which the bond-issuer grants a lease or sub-lease to the person seeking finance
• within 120 days of the effective date of the first transaction, the bond-issuer must provide prescribed evidence to the WRA that a satisfactory legal charge has been entered on the title in favour of the WRA
• before the bond ends, total capital payments made to the bond-issuer must be at least 60% of the value of the land interest at the effective date of the first transaction
• the bond-issuer must hold the land as a bond asset until the bond terminates
• once the land stops being held as a bond asset, it must be transferred back to the original owner within 30 days, and in any event within 10 years of the first transaction

Relief for the first transaction can be claimed if conditions 1 to 3 are met within 30 days of the effective date. Relief for the second transaction can be claimed if all seven conditions are met and the first transaction was properly returned with a claim to relief.

The guidance also explains when first-transaction relief is withdrawn. That happens if, for example, the required legal charge is not registered, conditions 5 or 6 are not met, the second transaction does not happen within 10 years, or it becomes clear that conditions 5 to 7 cannot or will not be met. If relief is withdrawn, the tax is recalculated on the market value of the first transaction as if no relief had been claimed.

What this means in practice

This is a conditional relief, not a blanket exemption. The structure may start with relief on the initial transfer, but that relief remains exposed until the later conditions are satisfied.

In practical terms, the relief works like this:

• the initial transfer of the property to the bond-issuer can be relieved early, provided the basic structure is in place quickly
• the WRA protects its position by requiring a legal charge over the title to be registered in its favour
• if the arrangement runs properly to completion and the land is transferred back on time, relief can also be claimed on the transfer back
• if the arrangement breaks down or departs from the statutory conditions, the earlier relief can be withdrawn

This means the parties need to think about the whole life of the bond, not just the initial transfer. A claim at the start is only part of the analysis.

The rule about bond-holder control is especially important. The relief is not available if a bond-holder, or a connected group of bond-holders, acquires sufficient rights to manage and control the bond assets to the exclusion of other bond-holders. The legislation is trying to distinguish a financing arrangement from one where particular bond-holders effectively control the underlying land.

There are two limited exceptions:

• where control arose unintentionally, the bond-holder did not know and had no reason to suspect this, and they dispose of enough rights as soon as reasonably practicable after becoming aware
• where a bond-holder underwrites a public offer, ends up with enough rights to have control because the issue is under-subscribed, but does not actually exercise management and control rights

How to analyse it

A sensible way to analyse this relief is to work through the structure in stages.

First, check that the arrangement is the right kind of bond arrangement. The guidance ties this to section 564G of the Income Tax Act 2007. If the arrangement does not fall within that framework, this relief is unlikely to apply.

Second, identify the land interest being transferred. It must be a qualifying interest, meaning a major interest in land, not a lease of 21 years or less.

Third, map the expected transaction sequence:

• transfer to the bond-issuer
• leaseback to the person seeking finance
• transfer back at the end

If the structure does not genuinely include those features, the relief may not fit.

Fourth, test the timing requirements carefully:

• conditions 1 to 3 must be met within 30 days of the effective date of the first transaction for first-transaction relief
• the legal charge evidence must be provided within 120 days of that effective date
• the transfer back must happen within 30 days after the land stops being a bond asset
• the transfer back must also happen within 10 years of the first transaction

Fifth, check whether the economic conditions can realistically be met. In particular, total capital payments to the bond-issuer before termination must be at least 60% of the value of the land interest at the time of the first transaction.

Sixth, consider control. Ask whether any bond-holder, alone or with connected bond-holders, has rights that could amount to management and control of the bond assets to the exclusion of others. If so, relief may be unavailable or may be withdrawn unless one of the specific exceptions applies.

Seventh, make sure compliance for the first transaction is correct. The second-transaction relief depends on the first transaction having been properly returned and relief claimed under the LTT rules.

Example

A company owns Welsh commercial property and wants to raise finance through an alternative finance investment bond. It transfers the freehold to the bond-issuer. The bond-issuer grants a lease back to the company so the company can continue using the property and rental income can support returns under the bond. The first transfer is relieved, assuming the initial conditions are met within 30 days.

The bond-issuer then registers the required legal charge in favour of the WRA and provides the prescribed evidence within 120 days. The bond runs its course, the property remains a bond asset, the required capital payments are made, and when the bond terminates the freehold is transferred back to the original owner within 30 days and within 10 years of the first transfer. On those facts, relief can also apply to the transfer back.

By contrast, if the property is not transferred back within the 10-year limit, or if the legal charge was never properly registered, the first-transaction relief may be withdrawn.

Replacement of the bond asset

The guidance recognises that the original property used as the bond asset may need to be replaced during the life of the arrangement. Relief can continue despite that substitution, but only if the statutory conditions are satisfied.

In broad terms, relief can continue for the original land and become available for the replacement land if:

• conditions 1 to 3 and 7 are met for the original land
• the bond-issuer stops holding the original land as a bond asset and transfers it back before the bond ends
• the original owner and bond-issuer enter into new arrangements falling within condition 1 for the replacement land
• the value of the replacement land interest at the time of transfer to the bond-issuer is at least equal to the value of the original land interest at the time of the first transaction

Where land is substituted, it does not matter that the original land was not held as a bond asset until bond termination, provided the relevant conditions are met for the replacement land instead.

The guidance also explains how the WRA charge over the original land can be discharged when replacement land is brought in. The evidence required depends on whether the replacement land is in Wales or outside Wales.

Why this can be difficult in practice

This relief is technically demanding because it depends on a chain of events over time, not just one transaction on one day.

The main practical difficulties are usually:

• working out whether the bond arrangement really falls within the tax definition of an alternative finance investment bond
• making sure the first transaction, leaseback, title security and later transfer back all happen within the statutory timetable
• monitoring whether the 60% capital payment condition will be met before bond termination
• assessing whether any bond-holder or connected group has acquired control of the underlying asset
• dealing with substitutions of land without breaking the conditions for relief

The control test is especially fact-sensitive. It is not enough just to ask who owns the bonds. The question is whether the rights under the bonds include management and control rights, and whether sufficient rights have been acquired to let one bond-holder, or a connected group acting jointly, exercise that control to the exclusion of others.

Another difficulty is that the guidance distinguishes between the initial availability of relief and later withdrawal of relief. A transaction may qualify at the start but still fail later if the arrangement does not complete in the required way.

Key takeaways

• This relief is designed to prevent LTT charges arising purely because an alternative finance bond structure uses land transfers that conventional bond finance would not require.
• Relief for the first transfer is conditional and can be withdrawn later if the statutory requirements, including timing, security registration and transfer back, are not met.
• Relief is denied or withdrawn if a bond-holder or connected group acquires control of the underlying asset, unless one of the narrow statutory exceptions applies.

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Useful article? You may find it helpful to read the original guidance here: Technical Guidance on Land Transaction Tax Relief for Alternative Finance Bonds

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