SDLT – Linked transactions

In December 2006 the parents of RB bought a flat for £400,000.  The flat was acquired as joint tenants by RB, his father and his mother. The purchase price was provided by RB’s parents and SDLT was paid on that figure.  At the time of acquisition it was agreed that RB would pay his parents £133,333.33 (one third of the total purchase price) for his share.  This amount was left outstanding as a debt.  There was no mortgage on the flat.

RB’s parents later agreed to sell their 2/3rds interest in the flat to RB and his partner, Ms B, Ms B buying a half share and RB buying the remaining 1/6th, for 2/3rds of £400,000.  Ms B would pay just over £180,000 in cash and the bank has agreed to lend Ms B and RB just over £180,000.

It was intended to structure this deal as follows:

1.      Several days before simultaneous exchange and completion RB and his parents sever the joint tenancy, so that RB owns half the property and his parents own 25% each, in exchange for RB agreeing to pay an additional £66,666.67 (1/6 of £400,000) to them.

Steps 2 to 4 below were to take place at completion:

2.      Ms B buys a half share in the property from RB’s parents for £200,000.

3.      RB pays £66,666.67 to his parents, as consideration for Step 1.

4.      RB pays off £93,333 of the £133,333 owed to his parents.

What were the SDLT consequences?

The linked transactions rule is intended to prevent transactions being fragmented to save SDLT.  Where there are linked transactions the rate of tax is determined by the aggregating the consideration for the linked transactions.

Section 108 Finance Act 2003 provides that linked transactions for SDLT purposes are those which ‘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.’  The test of connection is that in section 1122 Corporation Tax Act 2010 and in relation to individuals is as follows:

An individual (‘A’) is connected with another individual (‘B’) if:

• A is B’s spouse or civil partner
• A is a relative of B
• A is the spouse or civil partner of a relative of B
• A is a relative of B’s spouse or civil partner
• A is the spouse or civil partner of a relative of B’s spouse or civil partner

Advice

If Ms B bought a half share from RB’s parents and, as a separate transaction, RB bought the remaining 1/6th the transactions would not be linked as Ms B and RB were not connected with each other and Ms B was not connected with RB’s parents. This meant that the consideration would not be added together to determine the rate of tax with the result that Step 1 was free of tax and Step 2 was taxable at the 1% rate.

Step 1 was not notifiable to HMRC as SDLT was not payable because the transaction fell within the nil rate band (and not because of the application of a relief).

Step 4 was not subject to SDLT as there was no acquisition of a chargeable interest.

At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.