Particular transactions: technical guidance

Mr A has entered a contract to buy a property. When contracts are entered into he pays a deposit of 20% of the consideration This will not represent substantial performance. The contract is to be completed on 30 April 2020. On 1 December 2019 Mr A pays a further 70% of the consideration to the seller. He has now paid substantially the whole of the consideration and has therefore substantially performed the contract (even though he has not been given possession of the property). The effective date of the transaction is 1 December 2019 and a return will need to be made by 31 December 2019. On completion of the contract (30 April 2020) another return will need to be made.

B Ltd is allowed into possession in order to fit out a shop prior to commencing trading. The agreement with the landlord is that while the agreed lease start date is later, B Ltd may enter the property earlier to fit it out. The landlord however, wants a pro rata payment of the rent to be made on the date that B Ltd is first permitted access to the shop. The first payment of rent will be the substantial performance of that lease.

Alternatively, if the consideration was to be paid only by consideration other than rent and the seller allowed B Ltd to carry out fitting out works for the 2 months before the transaction completes, the right to occupy and use of the shop amounts to substantial performance of the contract.

Y Ltd enters into a contract to acquire land from W Ltd which it is to develop into a light industrial park. The area of the land is 3 hectares, and the price set in the contract is £1,200,000, with the contract signed on 1 July 2020 and a completion date of 30 June 2022. Each part of the land is of equal value. The completion date has been fixed at relatively far into the future because W Ltd has granted a lease over 2 hectares of the land to a camping site that has a termination date of 31 December 2021.

W Ltd agrees to let Y Ltd access on 1 July 2020 to the one hectare that is not leased so that it can start preparatory work. As the land is of equal value, and Y Ltd has only been given access to a third of the land, it has not taken possession of substantially the whole of the land. The contract has not therefore been substantially completed.

The owner of the campsite on land leased from W Ltd becomes ill and from 1 September 2020 is unable to run the campsite any longer. W Ltd, which has had a very positive relationship with the owner of the campsite, agrees to the immediate surrender of the lease for no consideration, and also allows the owner of the campsite to remain in occupation (under a licence) of the campsite operator‘s house and gardens, specifying that it must be vacated by 31 December 2021.

Y Ltd asks, on 1 January 2022, to be allowed access to the other 2 hectares (other than the operator‘s house and gardens). W Ltd agrees to this request, and W Ltd takes possession of the remaining 2 hectares (except the house) on 1 March 2022. At this point, W Ltd as taken possession of substantially the whole of the land and has therefore the contract has been substantially performed.

T Ltd enters into a contract to acquire a building from U Ltd. The property has a market value of £10m. The purchase price is to be met, as set out in a contract dated 5 January 2020, by the payment of £15m. That amount is to be paid in 2 tranches, £10m payable on 5 January 2020 and the balance in 2150. The WRA will consider that in such a case that the contract has been substantially performed as, whilst there remains a third of the consideration to be paid, that payment date is so far into the future that substantially all of the consideration has been given. The consideration for the transaction remains £15m, the amount in the contract.

In this example, it is also possible that T Ltd will have taken possession of the property as well. Therefore, it could have substantially performed the contract under those rules.

B Ltd (P2) enters into a contract to purchase a property from A Ltd (P1). The contract includes a clause that permits B Ltd to direct A Ltd to transfer the property to a third party. B Ltd pays A Ltd 100% of the agreed purchase price (£2,000,000) and has therefore substantially performed the contract and must make a return to the WRA within 30 days following the substantial performance of the contract. B Ltd then develops the land into a shopping centre. When the shopping centre is complete B Ltd sells the centre to C Ltd (P3) by separate contract for £6,000,000. B Ltd instructs A Ltd to transfer the property to C Ltd. C Ltd’s return (with B Ltd as seller) will show the consideration of £6,000,000. C Ltd will also complete the sale from A Ltd showing itself as buyer as B Ltd has not completed the transfer of the property to itself.

This is an example of how the rules apply to an assignment of rights.

• A enters into a sale and purchase agreement with B for some land with a consideration of £1m payable on completion.
• B assigns its rights under the contract to C for a payment of £100,000.
• C completes the acquisition and pays A £1m.

The outcome is that B must make a land transaction return for a transaction with consideration of £1m but can include a claim for full relief. C must make a land transaction return with consideration of £1.1m.

The transactions fall within Schedule 2 in the following way:

• the transactions fall within the definition of a pre-completion transaction in paragraphs 2 and 3;
• the pre-completion transaction is an ‘assignment of rights’ that falls within paragraph 6;
• the original contract is the contract between A and B, the original buyer is B, the transferee is C and the transferor is B;
• the transferee is not regarded as entering into a land transaction by reason of the pre-completion transaction (paragraph 5)

The position of the transferee, C, is covered mainly by paragraph 11.

C is the buyer under a land transaction and this is not prevented by the words ‘between the same parties’.

The chargeable consideration for C’s acquisition is established in line with the rules in Schedule 4. The result is that both the £1m given to A and the £100,000 given to B are included – total £1.1m.

The seller for C’s acquisition is A; the land transaction return should be completed accordingly.

The position of the transferor, B, is that:

• B is deemed to be the buyer under a notional land transaction with the same effective date as C’s land transaction;
• The chargeable consideration for the notional land transaction is the total of amount A and amount B. Amount A is £1m as that is the consideration given by C to A under the original contract. Amount B is nil as there was no other consideration given under the original contract, so the chargeable consideration for taxpayer B is £1m;
• The transactions permit B to claim full relief from tax (subject to complying with the specific relief rule and not meeting the conditions that would trigger the relief targeted anti-avoidance rule).

This is an example of a sub-sale. It also illustrates how the minimum consideration rule works where parties are connected.

• A enters into a sale and purchase agreement with B for some land for consideration of £1m payable on completion.
• B enters into a sale and purchase agreement for the same land with C for consideration of £900,000 payable on completion.
• At a single completion meeting the sales from A to B and from B to C are completed; consideration of £900,000 is paid by C to B and consideration of £1m is paid by B to A.

If B and C are unconnected and acting at arm’s length, then B must make a land transaction return for a transaction with consideration of £1m but can include a claim for full relief. C must make a land transaction return with consideration of £900,000.

This is because:

• the transactions fall within the definition of a pre-completion transaction that is a free-standing transfer;
• the original contract is the contract between A and B, the original buyer is B, the transferee is C and the transferor is B;
• the transferee is not regarded as entering into a land transaction by reason of the pre-completion transaction;
• the pre-completion transaction is not an assignment of rights so the rules concerning a free-standing transfer apply;
• in the absence of any special provision, B is regarded as entering into a land transaction with A for consideration of £1m (the amount in the original contract);
• the pre-completion transaction is a qualifying sub-sale and meets the relevant conditions set out for relief for qualifying sub-sales. So B can claim relief (subject to the complying with the specific relief rule and not meeting the conditions that would trigger the relief TAAR)

C’s acquisition from B is one which has completed without prior substantial performance. The consideration is taken to include the consideration given for the free-standing transfer, although that is nil in this case. So the consideration is just the £900,000 paid by C to B in the normal way.

The seller for C’s acquisition is A and the land transaction return should be completed accordingly.
 
If B and C were connected, C’s acquisition would be subject to the minimum consideration rule – paragraphs 15-17 – with the intended outcome that the chargeable consideration should be increased from £900,000 to £1m.

The consideration for C’s acquisition is taken to be the greatest of three amounts: either the £900,000 already determined above (i.e. what C paid to A) or the first minimum amount or the second minimum amount.

The first minimum amount is defined in paragraph 16(2) and (3). In this case it is the £1m that was due under the contract between A and B.

The second minimum amount is set out in paragraph 17 and is the total of the net amounts of consideration (as determined in sub-paragraph 17(2)) given by the relevant parties (as per sub-paragraph 17(3)) and subject to sub-paragraph 17(4)). In this case, B and C are the relevant parties. The net amount of consideration given by C is £900,000. The net amount of consideration given by B is £100,000 (that is, the £1m given to A less the £900,000 received from C). So the total of the net amounts of consideration is £1m.

The result is that the consideration for C’s acquisition is £1m – the greatest amount out of £900,000, £1m and £1m.

The seller for C’s acquisition is A and the land transaction return should be completed accordingly.

This means that the transactions described in this example will be linked for the purposes of Section 8(1) of the act. For an example of how this works in practice, see example 5.

This is an example of how the rules apply to an assignment of rights relating to only part of the land under the original contract.

• A enters into a sale and purchase agreement with B for some land with a consideration of £1 million payable on completion. The land consists of Plot 1 (value £600,000) and Plot 2 (value £400,000).
• B assigns its rights to Plot 2 under the contract to C.
• C completes the acquisition of Plot 2 and pays A £400,000.
• B completes the acquisition of Plot 1 and pays A £600,000.

The outcome is that B must make a land transaction return for a transaction with consideration of £400,000 in respect of Plot 2 but can include a claim for full relief of the tax arising on that amount of consideration. C must make a land transaction return with consideration of £400,000. B must also make a land transaction return for a transaction with consideration of £600,000 in respect of Plot 1.

This is because:

• the transactions fall within the definition of a pre-completion transaction;
• the pre-completion transaction is an ‘assignment of rights’;
• the original contract is the contract between A and B, the original buyer is B, the transferee is C and the transferor is B;
• the transferee is not regarded as entering into a land transaction by reason of the pre-completion transaction;
• as there is an assignment of rights relating to only a part of the original contract, paragraph 10 ensures that the rules are to be operated as though there was a separate original contract for Plot 2

The transferee, C, completes their return and pays tax on the basis that there was a ‘separate contract’ for Plot 2.

The position of the transferee, C, is covered mainly by paragraph 11.
C is the buyer under a land transaction and this is not prevented by the words ‘between the same parties’.

The £600,000 given by B on completion of the acquisition of Plot 1 is regarded as given under a different contract. C’s return will show themselves as buyer and A as seller with just the £400,000 given by C on completion as the chargeable consideration.
 
The position of the transferor, B, on the basis that there was a ‘separate contract’ for Plot 2 and relief being available, is that:

• B is deemed to be the buyer under a notional land transaction with the same effective date as C’s land transaction.
• The chargeable consideration for B’s acquisition is dealt with in paragraph 8(6)(a). That consideration is £400,000 as that is the consideration given by C to A in respect of the subject matter of the original contract.
• The transactions permit B to claim full relief from tax (subject to the complying with the specific relief rule and not meeting the conditions that would trigger the relief targeted anti-avoidance rule).

This leaves the acquisition of Plot 1 by B. The facts are that B has entered into a land transaction with chargeable consideration of the £600,000 that B gives to acquire Plot 1.

In this example, it is clear how much of the consideration under the original contract relates to Plot 1 and how much to Plot 2. More commonly, the consideration under the original contract would need to be apportioned on a just and reasonable basis as required under paragraph 4 of Schedule 4.

If the subject-matter of the original contract is a freehold interest, an assignment of rights (or sub-sale) involving the grant of a lease out of that freehold cannot be a pre-completion transaction, as the lease is not the whole or part of the subject-matter of the original contract (paragraph 3(1)(a) and 4(1)). The same rules apply if the subject-matter of the original contract is a head-lease and the assignment (or sub-sale) involves the grant of a sub-lease.

This is an example of how the rules apply to a sub-sale relating to only part of the land under the original contract.

• A enters into a sale and purchase agreement with B for some land with a consideration of £1 million payable on completion. The land consists of Plot 1 (value £600,000) and Plot 2 (value £400,000).
• B enters into a sub-sale agreement to sell Plot 2 to C for £400,000.
• At a single completion meeting, the sales from A to B and from B to C are completed; consideration of £400,000 is paid by C to B and consideration of £1m is paid by B to A.

B must make a land transaction return for the land transaction with consideration, on first principles, of £1m but can include a claim for partial relief reducing the consideration to £600,000. C must also make a land transaction return (with B as seller), with consideration of £400,000.
 
The transactions are within Schedule 2 because:

• the transactions are within the definition of a pre-completion transaction;
• the pre-completion transaction is a ‘free-standing transfer’

The original contract is the contract between A and B, the original buyer is B, the transferee is C and the transferor is B.

The transferee is not regarded as entering into a land transaction by reason of the pre-completion transaction.

The pre-completion transaction is not an assignment of rights so paragraph 13 applies.

C’s acquisition from B is one which has completed without prior substantial performance. The consideration is taken to include the consideration given for the free-standing transfer, although that is nil in this case. So the consideration is just the £400,000 paid by C to B in the normal way.

In the absence of any special provision, B is regarded as entering into a land transaction with A for consideration of £1m.

The pre-completion transaction is a qualifying sub-sale if the relevant conditions are met. B can therefore claim relief (subject to complying with the specific relief rule and not meeting the conditions that would trigger the relief TAAR). Since the sub-sale relates to only part of the subject-matter of the original contract, B cannot claim full relief. Instead, the consideration for the transaction is reduced by the amount of the £1m consideration that relates to Plot 2. In this case that is £400,000 so the B’s consideration is reduced to £600,000.

This is an example of how the rules apply to a sub-sale relating to only part of the land under the original contract, and how the linked transaction rules apply where the parties are connected.

• A enters into a sale and purchase agreement with B for the freehold of some non-residential land with a consideration of £1 million payable on completion. The land consists of Plot 1 (value £600,000) and Plot 2 (value £400,000).
• B enters into a sub-sale agreement to sell Plot 2 to C for £400,000.
• B and C are connected
• At a single completion meeting, the sales from A to B and from B to C are completed; consideration of £400,000 is paid by C to B and consideration of £1m is paid by B to A.

B must make a land transaction return for the land transaction with consideration, on first principles, of £1m but can include a claim for partial relief reducing the consideration to £600,000.

Because B and C were connected, C’s acquisition is subject to the minimum consideration rules (paragraphs 15-17). In this example, the apportionment of £600,000 / £400,000 between Plot 1 and Plot 2 is fair and reasonable. Under the minimum consideration rules, the first minimum amount and second minimum amount are both £400,000 in this example. This is the same as the amount that the consideration would be under the normal rules. The chargeable consideration for C’s acquisition is therefore £400,000.

Even though C is purchasing from B, for the purposes of the legislation, the seller for C’s acquisition is A, as per paragraph 14(2) (see also 14(5)). This means that the two transactions (between A and B, and B and C) are linked for the purposes of Section 8(1) of LTTA2017. Therefore, the tax for each return (using the bands and rates in force as at 01/04/2018) must be calculated as follows:

• the total chargeable consideration for both transactions is £1,000,000 (A can claim partial relief of £400,000, reducing the consideration from B to A to £600,000. Add to this the £400,000 C must pay to B, gives a total of £1,000,000) 
• the total tax chargeable against £1,000,000 using the non-residential bands and rates is £38,500
• B must file a return showing tax of £38,500 / £1,000,000 X £600,000 = £23,100
• C must file a return showing tax of £38,500 / £1,000,000 X £400,000 = £15,400
• Both returns must show A as the seller

This example covers a number of slightly different scenarios involving a series of assignments of rights.

In the first scenario, the final transferee pays an additional amount of consideration.

• A enters into a sale and purchase agreement with B for some land with a consideration of £1 million. B pays A a deposit of £100,000.
• B assigns its rights to C for £100,000 and C assigns its rights to D for £150,000.
• D pays A £900,000 on completion.

D is chargeable as the transferee. The chargeable consideration is £900,000 plus £150,000 totalling £1,050,000, that is the total consideration given by D.

Paragraph 8 applies in the following way. The acquisition by D is ‘the transferee’s land transaction’ (paragraph 8(1)(a)). The assignment from C to D is ‘the implemented assignment of rights’ (paragraph 5(3)). B is the buyer under a notional land transaction (paragraph 8(1)). C is the buyer under an additional land transaction (paragraph 8(3)).

The chargeable consideration for B’s transaction – the notional land transaction – is given by paragraph 8(6)(a). It is the £100,000 paid by B to A (amount ‘B’ in paragraph 8(8)) plus the £900,000 paid by D to A on completion (amount ‘A’ in paragraph 8(7)(b)) totalling £1m. B can claim relief.

The chargeable consideration for C’s transaction – an additional land transaction – is given by paragraph 8(6)(b). It is the £100,000 paid by C to B (amount ‘C’ in paragraph 8(9) – in calculating amount C, ‘the preceding assignment of rights’ was the assignment from B to C (paragraph 8(10)) plus the £900,000 paid by D to A on completion (amount ‘A’ - paragraph 8(7)(b)) totalling £1 million. C can claim relief.

In the second scenario, D pays less.

• A enters into a sale and purchase agreement with B for some land with consideration of £1 million. B pays A a deposit of £100,000.
• B assigns its rights to C for £100,000 and C assigns its rights to D for £50,000.
• D pays A £900,000 on completion.

D is chargeable as the transferee. The chargeable consideration is £900,000 plus £50,000 totalling £950,000, that is the total chargeable consideration given by D.

The position of B and C is the same as in the previous scenario.
 
In the final scenario, there is a series of assignments of rights where D is connected with C. In this example, C gets a good deal from B in an entirely commercial transaction.

• A enters into a sale and purchase agreement with B for some land with consideration of £1 million. B pays A a deposit of £100,000.
• B assigns its rights to C for £50,000 and C assigns its rights to D for nil. C and D are connected.
• D pays A £900,000 on completion.

D is chargeable as the transferee. The chargeable consideration is £900,000 plus nil totalling £900,000. But the minimum consideration rule applies. Both the first and second minimum amounts are £950,000 (see below) so D is chargeable on £950,000.

The position of B and C is similar to the earlier examples.

The first minimum amount is given by paragraph 16(3). C is the transferor (‘T’) (‘Condition B’ in paragraph 16(3)) and C is also ‘the first T’. Paragraph 16(3) picks up only the £50,000 paid by C to B plus the £900,000 payable on completion, and not the full £1 million under the contract between A and B.

The second minimum amount is given by paragraph 17. The relevant parties are C and D, not B (paragraph 14(4)). The net amount of consideration given by D is £900,000 and the net amount of consideration given by C is £50,000 (paragraph 17(2)). The second minimum amount is also £950,000.

This is an example of a series of sub-sales.

• A enters into a sale and purchase agreement with B for some land with consideration of £1 million. B pays A a deposit of £100,000.
• B enters into a sub-sale agreement with C for £1m, with C paying a deposit of £100,000.
• C enters into a sub-sale agreement with D for £1.1m, with D paying deposit of £200,000 to C.
• The contracts are completed together. On completion, D pays C £900,000, C pays B £900,000, and B pays A £900,000.

B and C are chargeable on £1m according to the normal rules as they have completed (without prior substantial performance) their contracts. They can claim relief. D is chargeable on £1.1m.

• A enters into a sale and purchase agreement with B for Plot 1 with consideration of £1m which reflects the market value of Plot 1. B pays A a deposit of £500,000.
• B assigns its interest under the contract to C in return for consideration of Plot 2 from C. Plot 2 is worth £400,000. This is acceptable to B because the site of Plot 2 is commercially beneficial to B.
• On completion, C pays A £500,000 for Plot 1.

C has entered into one transaction as buyer (the acquisition of Plot 1 by C) in consideration of entering into another transaction as seller in another (the acquisition of Plot 2 by B). The exchange rules therefore apply.

B is chargeable on a notional land transaction for which relief can be claimed. The chargeable consideration is £1m.

B is chargeable on the acquisition of Plot 2 from C. The chargeable consideration is determined by paragraph 5 of Schedule 4. This is the market value of Plot 2 (£400,000). That amount cannot be apportioned in any way as it was not given for anything other than as consideration for Plot 2. So the chargeable consideration is £400,000.

C is chargeable on the acquisition of Plot 1. The chargeable consideration is given by paragraph 5 of Schedule 4. The market value of Plot 1 is £1m. Paragraph 1 of Schedule 4, read according to paragraph 8 of Schedule 2, would give chargeable consideration of £900,000 – the £500,000 given by C to A on completion plus the consideration given for the assignment, namely the £400,000 market value of Plot 2 (paragraph 8(7)).

• A enters into a sale and purchase agreement with B for Plot 1 with a consideration of £1m which reflects the market value of Plot 1. B pays A a deposit of £500,000.
• B enters into a sub-sale agreement for Plot 1 with C, for consideration of £500,000 cash plus Plot 2. Plot 2 has a market value of £400,000. This is acceptable to B because the site of Plot 2 is commercially beneficial to B. The agreements are completed at the same time and in connection with each other.

C has entered into one transaction as buyer (the acquisition of Plot 1 by C) in consideration of entering into another transaction as seller in another (the acquisition of Plot 2 by B). The exchange rules therefore apply.

B is chargeable on the acquisition of Plot 1 from A but can claim relief.

B is also chargeable on the acquisition of Plot 2 from C. The chargeable consideration is determined by paragraph 5 of Schedule 4. This is the market value of Plot 2 (£400,000).

C is chargeable on the acquisition of Plot 1. The chargeable consideration is given by paragraph 5 of Schedule 4. The market value of Plot 1 is £1m, the chargeable consideration is therefore £1m.

• A enters into a sale and purchase agreement with B for some land with a consideration of £1m which reflects the market value of the land. Completion is set for 2 years after the agreement is entered into.
• After one year, the market value of the land has increased to £1.1m. B enters into a sub-sale agreement with C for consideration of £900,000. C is a company connected with B. Both agreements are completed at the same time and in connection with each other.

B is chargeable on its acquisition of the land and can claim relief.

C is chargeable on its acquisition of the land. In the first instance, the chargeable consideration given by paragraph 13 (as it applies to paragraph 1 of Schedule 4) is £900,000.

The deemed market value rule in section 53 does not apply because the seller for C’s acquisition is A (paragraph 10(4)). So the chargeable consideration is not increased to £1.1m.

However, B and C are connected, so the minimum consideration rule applies to increase the chargeable consideration for C’s acquisition from £900,000 given to £1m.

• A enters into a sale and purchase agreement with B for some land with a consideration of £1m which reflects the market value of the land.
• B enters into a sub-sale agreement with C for consideration of £1m. C is a partnership in which B has a 90% partnership share. The 2 agreements complete at the same time and in connection with each other.

B is chargeable on its acquisition of the land and can claim relief.

C is chargeable on its acquisition of the land. The chargeable consideration given by paragraph 13 (as it applies to paragraph 1 of Schedule 4) is £1m. C does not get the benefit of the rules for special partnership transactions in Part 3 of Schedule 15 because the seller for C’s acquisition is A (i.e. not a partner in the partnership).

This is an example of how the rules apply to a novation.

• A enters into a sale and purchase agreement with B for some land with a consideration of £1 million payable on completion.
• A, B and C enter into a deed of novation under which: C replaces B as the buyer of the land; and C pays B £100,000 in consideration for B relinquishing its rights under the first contract. Under the deed, A and B are released from any obligations to each other. Following the deed of novation, the original contract between A and B no longer exists. It has been replaced by a new contract between A and C.
• C completes the new contract to acquire the land from A and pays A £1m.

The novation is a pre-completion transfer because it is a free-standing transfer. It is not an assignment of rights because C’s right to call for a transfer is not a right under the original contract, it is a right under the new contract. C is not regarded as entering into a land transaction by reason of the novation.

On completion, C is the buyer under a land transaction. The chargeable consideration under paragraph 13 is £1.1m.

B is not the buyer under a land transaction so is not required to file a land transaction return and has no need to claim relief.