Five traps in linked transactions

Without an effective anti-avoidance rule, I could buy a £375,000 house in three separate transfers of the front garden, house and back garden at £125,000 each, claim the full nil rate band on each transfer and pay no stamp duty land tax. The linked transactions rule exists to tax these transfers as if they were a single purchase at the aggregate price. Linked transactions are also considered together to determine whether the transaction as a whole is subject to residential or non-residential rates of SDLT, and whether multiple dwelling relief applies. Transactions are linked if they form part of a single scheme, arrangement or series of transactions between the same vendor and purchaser or, in either case, persons connected with them. Which is simple enough in my example, but the complexity of property transactions – and the SDLT regime – inevitably leads to traps for the unwary. Trap 1: a question of fact Whether transactions are linked is a question of fact. Transactions between the same parties on the same date are not necessarily linked, while transactions on different dates between different parties may be linked. Confused? HMRC has traditionally focused on “commercial linkage”, ie, would the parties have entered into either transaction, on the same terms, without the other? Auctions are always cited as the classic example of transactions between the same parties on the same date that are not normally linked, but any transaction is subject to the same test. The difficulty for practitioners is that this means it will not always be obvious from heads of terms or from the transaction documents whether transactions are actually linked. Trap 2: connected persons The extension of the linked transactions rule to connected persons presents another potential pitfall. Without it, tax could be avoided by carving up a transaction between various family members or group companies. My wife buys the house and I buy the garden. Section 1122 of the Corporation Tax Act 2010 determines whether parties are connected, and should always be consulted. Individuals can be connected with individuals, individuals can be connected with companies and companies can be connected with each other. Wide definitions mean that companies that would not qualify as group companies can still be connected, so beware.  Trap 3: linked, but not ‘linked’ The requirement for the linked transactions to involve the same seller and the same buyer (or connected persons) can offer unexpected respite from the linked transactions rule. If a buyer (perhaps a developer) is buying multiple properties from different sellers to assemble a larger site, they will frequently assume that these transactions must surely be linked. However, although they comprise a single scheme so far as the buyer is concerned, the transactions will not be linked (provided none of the various sellers are connected with each other). Trap 4: aggregate, calculate and allocate When SDLT was first introduced, with tax being paid at a single percentage rate on the entire chargeable consideration, the linked transaction rules worked by aggregating the consideration to determine which percentage rate to apply to all the linked transactions. The introduction of the slice approach to SDLT complicated things. It is now necessary to calculate the tax that would be due if the linked transactions were a single transaction, and then allocate that figure between the individual transactions on a pro rata basis. Similarly, where the linked transactions are the grant of new leases, the tax is calculated by aggregating the net present values of the individual leases, calculating the tax on the aggregate net present value and then allocating the tax among the individual leases on a pro rata basis. Trap 5: subsequent linked transactions Linked transactions do not always take place at the same time. A later transaction, even if not contractually linked with an earlier transaction, may still be linked to the earlier transaction. For example, the buyer may receive preferential terms for the second transaction because the first transaction happened. As with Trap 1, this will be a question of fact on which practitioners may require clarification. As well as affecting the tax payable on the later transaction, it is important to revisit the SDLT position of the earlier transaction. The fact that the earlier transaction is now linked with a later transaction will usually increase the tax payable on the earlier transaction and require a further return – in the form of a letter – under section 81A of the Finance Act 2003. And don’t forget the phenomenon of successive linked leases. So far, we have been discussing the aggregating of transactions relating to different physical extents of property. However, the successive linked leases rule is concerned instead with consecutive interests in the same property. So, rather than taking a 15-year lease, a tenant takes three five-year leases and claims a nil rate band on each. Consecutive leases are not linked if each subsequent lease is negotiated separately on an arm’s length basis, even if the tenant enjoys statutory renewal rights under the Landlord and Tenant Act 1954. But if the later lease is granted at the outset, or pursuant to an option to renew, then the successive linked leases rules require the tax to be calculated (and, if necessary, recalculated) so that the tenant eventually pays the same tax as if they had originally taken one lease for the full term. Bill Chandler is a professional support lawyer at Hill Dickinson LLP Image © analogicus/Pixabay