Guidance on Land Transaction Tax (LTT) alternative property finance relief.
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LTTA/7017 Alternative property finance reliefs
Where alternative property finance arrangements are used to fund a purchase, reliefs are available to avoid taxing the transaction more than would be the case when a typical interest bearing mortgage product is used.
Relief is available for certain transactions where one of 3 different sets of alternative property finance arrangements is in place:
- where a financial institution buys a property, then leases or sub-leases it to a person and agrees that at the end of that term it will transfer the property to that person;
- where a financial institution and a person purchase a property as beneficial tenants in common; or
- where a financial institution purchases a property and re-sells it to a person, the person borrows some or all of the purchase price from the financial institution and grants a mortgage to the financial institution over that property
LTTA/7018 Alternative property finance relief involving a lease or sub-lease
(Paragraph 2 Schedule 10)
Relief is available where there are arrangements between a financial institution and a person under which:
- a financial institution purchases, or leases, a property, whether that is a major interest or an undivided share of a major interest;
- if the interest acquired by the financial institution is an undivided share, the major interest must be held by the financial institution and the person as beneficial tenants in common;
- the property is leased, or sub-leased, to the person; and
- there are agreements in place that at the end of the term of the alternative finance arrangements for the whole of the interest purchased by the financial institution in the property , to be transferred to the person
Under the arrangement there may also be provision for shares in the property to be transferred to the person in stages during the term.
Provided that certain conditions are met, the lease, the transfer of the property and any intermediate transfers of undivided shares in the property are relieved from tax. By providing these reliefs, the tax payable will be the same as would be payable had a typical interest bearing mortgage product is used to fund the purchase.
The initial purchase (called the ‘first transaction’ in the legislation) of the property will generally be chargeable (as would be the case where a person buys a property with a typical interest bearing mortgage product). However, if the seller is the person or a financial institution which already held the property under the above type of arrangements with the person, the initial purchase is also relieved. This relief is provided so that tax is not payable as would be the case for a typical interest bearing re-mortgage product.
The alternative property finance arrangements will require the person to be granted a lease out of the interest owned by the financial institution. This transaction formalises the occupation of the property by the person. It also creates the income stream for the financial institution (in the form of rents) and for the person to make capital payments to the financial institution in order to reduce the amount of funding provided by the financial institution (if reduction in this manner is part of the arrangements). This transaction where the person acquires a lease from the financial institution is called the ‘second’ transaction in the legislation.
At the end of, or during the period the arrangements are in force, the interest owned by the financial institution may be transferred from the financial institution to the person. This transaction, or series of transactions, is relieved from LTT. These transactions are called a ‘further transaction’ in the legislation.
Relief for the second transaction may only be claimed if the provisions of the LTTA and the TCMA have been complied with in relation to the first transaction. Likewise, relief for a further transaction may only be claimed if the provisions of the LTTA and the TCMA have been complied with in relation to the first and second transaction.
Further transactions are not to be treated:
- as substantially performed unless and until the final transaction is entered into (thus dis-applying the rules about substantial performance); or
- as the grant of an option under the rules about options and rights of pre-emption in section 15 of LTTA
This ensures that, in the event that there are a number of further transactions that each one does not need to be notified to the WRA, but the final transaction that transfers the interest (or the remaining interest) held by the financial institution to the person is potentially notifiable.
LTTA/7019 Alternative property finance relief where land is sold to a financial institution and re-sold to a person
Relief is available where a financial institution buys a property and sells it to a person, and that person grants a legal mortgage over that property in favour of the financial institution.
There are 2 land transactions taking place under these arrangements; the combined effect of the reliefs is to bring the LTT on the acquisition using these arrangements, in line with that payable on a purchase financed with a typical interest bearing mortgage product.
For this relief to be claimed, arrangements must be entered into between a person and a financial institution as follows:
- the financial institution purchases a major interest in land or an undivided share in a major interest;
- the institution sells that interest to the person, that is the institution sells the whole of the major interest or undivided share it obtained to the person; and
- the person grants the financial institution a mortgage over that interest
The first transaction (the purchase of a major interest in land by the financial institution) will generally be chargeable to LTT but relief may be claimed by the financial institution if the seller is:
- the person who enters into the arrangements; or
- another financial institution by whom the interest was acquired under arrangements described above and the arrangements were entered into between it and the person
Relief from LTT may be claimed on the sale of the property by the financial institution to the person, if all the requirements relating to the first transaction have been complied with. This includes payment of any LTT due on the first transaction. This is because the person obtaining the funding from the financial institution will effectively have already paid LTT on the purchase of the property either before the transfer to the financial institution or at the point of purchase by the financial institution from a third party seller.
Where the replacement of main residence rules are met following a transaction subject to higher rates, it is the financial institution that must make the claim to repayment of the higher rates portion of the transaction by amending the tax return accordingly, rather than the person obtaining the funding from the financial institution. This is because it is the financial institution that filed the return, rather than the individual, and it is the financial institution that paid the devolved tax and so may make a claim for repayment. See our guidance at LTTA/8090 on the rules on replacement of main residences.
LTTA/7020 Situations when relief cannot be claimed
(paragraphs 5 and 6 schedule 10)
Relief may not be claimed where the following apply or could apply:
- group relief, reconstruction relief or acquisition relief must not be available for the first transaction (even if the relief has been withdrawn);
- the alternative property finance arrangements must not involve arrangements or any connected arrangements for someone to acquire control of the financial institution even if the arrangements are conditional;
- all the requirements relating to the first transaction and the second transaction are not complied with, including payment of any LTT due on the first transaction;
- at anytime following the grant of the lease (or sub-lease) (the second transaction) and the further transactions either the financial institution did not hold the interest acquired by the first transaction and the person did not must hold the lease (or sub-lease) granted by the financial institution in the second transaction
LTTA/7021 Interest held by financial institution to be treated as an exempt interest
(paragraph 7 Schedule 10)
An interest held by a financial institution as a result of the ‘first transaction’ (the acquisition of a major interest in land or an undivided share in a major interest by the financial institution) is an exempt interest. Any transfer of that interest therefore incurs no LTT and is not notifiable to the WRA. This permits an interest held by the financial institution to be transferred to another financial institution where the same alternative property finance arrangements are in place, providing the users and providers of such arrangements with similar tax treatment to when a person moves from one interest bearing mortgage product to another with a different lender.
This rule does not, however, make either the first transaction itself or any further transactions, a land transaction involving an exempt interest. Relief will be available for these transactions, but the transactions remain notifiable to the WRA.
The interest ceases to be an exempt interest if:
- the lease or sub-lease (the second transaction) ceases to have effect, for example the termination point is reached or the lease is terminated early; or
- the further transaction (the right of a person to require the institution to transfer the major interest purchased by the institution under the first transaction) ceases to have effect or is subject to a restriction
(Paragraphs 3(1)(b), 6(3), 8 and 9 Schedule 10)
For the purposes of these reliefs:
- ‘financial institution’ has the meaning given by section 564B of the Income Tax Act 2007, but does not include a person with permission to enter into credit agreements and contracts for hire of goods (section 564B(1)(d) ITA 2007);
- ‘arrangements’ include any agreements, understanding, scheme, transaction or series of any of the aforementioned whether these are legally enforceable or not;
- ‘legal mortgage’ has the meaning given in section 205(1)(xvi) of the Law of Property Act 1925;
- where the person concerned has died, references to a person are to be read as references to the person’s personal representatives;
- ‘connected arrangements’ means any arrangements entered into in connection with the making of the alternative finance arrangements (including arrangements involving one or more persons who are parties to the alternative finance arrangements);
- Section 1124 of the Corporation Tax Act 2010 (c. 4) applies for determining who has control of the relevant financial institution