A Mexican Standoff – Sub-Sale Relief Simplified

Tax implications at first glance

For capital gains tax purposes, ignoring legal fees and incidental costs of acquisition and disposal, Mr Smith will receive proceeds of £900,000 with a base cost of £500,000, leaving him with a gain of £400,000.

Savvy Real Estate Ltd would have a cost of sales of £900,000 and would recognise a trading income of £100,000 on the subsequent sale of £1m to Mr Jones. The £1m would then form Mr Jones’ base cost.

Moving on to stamp duty land tax on purchase, Savvy Real Estate Ltd would ordinarily, as a buyer of residential property, incur stamp duty land tax on the full purchase price of £900,000, subject to the appropriate rates. In turn, Mr Jones would incur stamp duty land tax on the value of £1m. Such an arrangement would seem slightly unfair, as it would result in a double tax charge within a short time frame of each transaction. This is where sub-sale relief comes in.

Sub-Sale Relief

Under the Finance Act 2003 Sch 2a, when an arrangement is in place by which:

Person A holds a property they wish to sell.

Person B acquires the property from Person A.

Person B then immediately sells the property to Person C on the same day (likely for a profit).

Person B is effectively treated as if they have made a commission, receiving full relief from stamp duty land tax for their acquisition of the property from person A.

A stamp duty land tax return will need to be made both by person B and person C; however, person B is able to claim relief for “sub-sales” on the return itself or by amendment of their original return. As both completions happen on the same day, it is much more efficient to claim the relief immediately rather than amending a return.

Practical Tip

HMRC’s manual SDLTM21600 – Example 2, Subsale and Minimum Consideration Rule – The HMRC internal manual – GOV.UK states:

“At a single completion meeting, the sales from A to B and from B to C are complete; consideration of £900,000 is paid by C to B, and consideration of £1 million is paid by B to A.”

This line often causes some confusion. Whilst the completions must happen at the same “time” per schedule 2a, that does not mean that it has to happen at the same meeting. It is our opinion that the completions must happen on the same day. This would be the only way such a transaction could be implemented commercially. Otherwise, if you had both the buyer and seller sitting in the same room, they wouldn’t go through with the transaction with intermediary B if they could save themselves the additional fees by dealing with each other directly – cutting out the middleman.

The quotation above means that the original contract must not be substantially performed at the time of entering into the qualifying sub-sale.

Anti-Avoidance

There are two main considerations when looking at sub-sale relief which may impact the legitimacy of the claim being:

1. The Minimum Consideration Rule
2. Section 75A Finance Act 2003

The minimum consideration rule is applied when the ultimate purchaser of the property concerned is not entering into the transaction at an arm’s length OR is connected with the intermediary claiming sub-sale relief. This rule ensures that the amount of SDLT liability is at least based on the amount due to be paid by the original buyer (the intermediary) on the original contract. Otherwise, the intermediary could earn a substantial payout (effectively a commission) without risking any adverse tax consequences.

Section 75A of the Finance Act 2003 contains “catch-all” general provisions which, in a way, mimic the Ramsay principle. Essentially, if an additional step forms part of the ultimate transaction which, to an outside observer, could be seen as implemented purely to achieve an avoidance of tax (even though that may not be the primary motive of implementing such a step), the sub-sale relief will be withdrawn or denied.

Conclusion

Sub-sale relief may be useful to buyers of property who do not intend to retain the property over a longer term. It is important to remember that such a transaction would be rare, and specific steps must be taken to ensure relief is due and no anti-avoidance provisions are triggered.

Michael Bleyswyck
External Consultant

For more information, please contact us at: consultancy@vantagefeeprotect.com