Guidance on particular transactions for Land Transaction Tax.
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LTTA/2130 Contract and transfer
When a contract is completed or substantially performed there will be a land transaction and the buyer may need to make a return if the transaction is notifiable, and may need to pay land transaction tax if the transaction is a chargeable transaction. A person is not considered to have entered into a land transaction if they have only entered into a contract.
LTTA/2140 Contract completed without previous substantial performance
Where a contract is completed without prior substantial performance, the contract and the completion of that transaction are parts of the same single land transaction. The effective date for the land transaction is the date of completion.
LTTA/2150 Substantial performance
Where a contract is substantially performed without having been completed, the contract is treated as if it were the transaction and the effective date of the transaction is the date the contract is substantially performed.
When substantial performance occurs
A contract will be substantially performed when:
- the buyer, or a person connected to them, takes possession of the whole or substantially the whole of the subject matter of the contract; or
- a substantial amount of the consideration is paid or provided
Possession of the subject matter includes the buyer, or a person connected to them, having the right to receive, or actual receipt of, rents and profits from the property. Substantial performance through the taking of possession will occur whether it occurs as a result of the contract or under a licence, temporary lease or a tenancy at will.
Where there is no rent as part of the consideration, a substantial amount of the consideration is paid when the whole or substantially the whole of the consideration is paid or provided.
Where the only consideration is rent, a substantial amount of the consideration is paid when the first payment of rent is made.
Where the consideration includes both rent and consideration other than rent, substantial performance will occur at the earliest of:
- when the whole or substantially the whole of the consideration is paid or provided; or
- the first payment of rent is made
Where the consideration is other than rent, substantially ‘the whole’ means an amount equal to or greater than 90% of the total consideration due under the contract, unless the circumstances of the transaction are such that in substance the whole of the consideration has been paid or provided.
In the event that the buyer already has occupation of the premises under a different interest, for example when the purchase is of a freehold and the purchaser is a tenant, substantial performance on the basis of possession will not be triggered at the time of the contract as long as the purchaser adheres to the covenants in the lease. However, depending upon the facts, it may still be possible for the taxpayer to trigger substantial performance by payment of substantially all of the consideration.
LTTA/2160 Substantial performance - Completion of contract following substantial performance
Where a transaction has been substantially performed and is subsequently completed, both the substantial performance of the contract and the completion of the contract can be notifiable transactions.
Where the tax charged on the completion of the contract is higher than the amount of tax chargeable on the substantial performance of the contract, the additional amount must be included in the self-assessment for that return. The return for both the substantial performance of the contract and the return for the completion of the transaction must show the full amount of consideration payable, known at the date each return is completed.
LTTA/2170 Substantial performance – contract not carried into effect
Following the substantial performance of a contract, it is possible that the contract will (in whole or part) be rescinded, annulled, or for any other reason not carried into effect. If this occurs, the WRA will pay back the tax paid (or the appropriate amount of the tax) if an amended return is made by the taxpayer reflecting the effect of the rescinding etc. of the contract (or part of the contract).
Repayment can only be achieved through the submission of an amended return. An amended return can only be made during the period of 12 months beginning with the filing date for the return that has been impacted by the rescinding etc. of the contract.
The consequence of this rule is that the taxpayer has only the 12 months from the filing date for the substantial performance of the contract. That is 12 months and 30 days from the effective date of the transaction. If the contract is rescinded outside this period, the taxpayer will not be able to amend their return and will not be able to claim a repayment.
LTTA/2180 Contract providing for transfer to third party
Where a contract is entered into that requires one party to the contract (P2), the right to direct or request the seller (P1) to transfer the subject matter of the contract to themselves or to a third party (P3),the following rules apply:
- P2 is not treated as entering into a land transaction as a result of entering into the contract;
- if the chargeable interest is transferred to P3 at P2’s direction, without substantial performance of the contract by P2 having occurred before that transfer, then there is only one land transaction, that between P1 to P3;
- if the chargeable interest is transferred to P2, the usual rules relating to contract and transfer apply;
- the usual rules also apply in relation to any contract between P2 and P3;
- if the contract is substantially performed by P2, even if the contract is subsequently completed by the transfer of the chargeable interest from P1 to P3, P2 is treated as having acquired a chargeable interest and entered into a land transaction. The effective date of that transaction is the date of substantial performance
In the event that, following substantial performance of the contract by P2, the contract is rescinded, annulled or otherwise not carried into effect, repayment of tax may be possible.
An example of this is a development agreement where the developer has the right to enter onto the land and build on it and then direct the conveyance of the completed plots. In this case, the effective date of the transaction is the date when the contract is substantially performed by P2; when P2 took possession of the property in order to develop it. There will therefore be two LTT liabilities arising; one on the substantial performance of the contract by P2 and a second on the conveyance to the third party end buyer.
Where P2 directs the original seller (P1) to transfer a plot (or the whole of the property) to P3, the rules above about ‘contract and conveyance’, ‘completion without substantial performance’ and ‘substantial performance without completion’ apply to the contract between P2 and P3 and to the conveyance from P1 to P3. The result is that P3 is liable to pay LTT on the consideration paid to P1 or P2, either on completion or on substantial performance of their contract.
LTTA/2190 Contract providing for transfer to third party: effect of transfer of rights
These rules complement the rules for a contract providing for transfer to third party.
If a contract provides for the subject matter to be transferred from the seller (P1) to a third party (P3) at the direction of the buyer (P2) but the rights of that buyer become exercisable by another person (P4) then:
- P4 is not regarded as entering into a land transaction by reason of the transfer of rights;
- the transfer of rights is treated as a separate (‘secondary’) contract;
- P4 is treated as though they were the buyer (P2) under the original contract;
- the consideration due from P4 under the secondary contract is; the consideration under the original contract that relates to the subject matter of the transfer of rights that is to be given by P4 (or a person connected to them), and, the consideration for the transfer of rights
If the original contract has been substantially performed by P2 then that substantial performance is disregarded (that is to say that P2 is not liable to the return obligations arising from the substantial performance) if it occurs:
- at the same time as, and in connection with, the substantial performance of the secondary contract; or,
- after the transfer of rights to P4.
If there are a number of successive transfers of rights, the rules are applied to each of those transfers of rights separately. As such the substantial performance of a secondary contract related to an earlier transfer of rights is to be disregarded if it occurs:
- at the same time as and in connection with the substantial performance of the secondary contract arising from a subsequent transfer of rights; or,
- after that subsequent transfer
If the transfer of rights relates to only part of the subject matter of the original contract, or only to some of the rights under that contract then:
- the rules apply only in relation to that part of the subject matter or those rights; and,
- the contract relating to the other part or rights is treated as a separate contract
The effective date of a land transaction arising on a secondary contract cannot be earlier than the date of the assignment etc. that resulted in the transfer of rights to P4.
LTTA/2200 Pre-completion transactions
(section 13 and Schedule 2)
The starting point for a pre-completion transaction is that there must be a contract for a land transaction which is to be completed by a transfer. Before that ‘original contract’ is substantially performed or completed, the buyer under that contract may enter into a further agreement as a result of which another person is entitled to call for the transfer of all or part of the subject-matter of the original contract. Such an agreement is a pre-completion transaction.
In the context of a pre-completion transaction, the buyer under the original contract is sometimes called ‘the transferor’ and the ultimate buyer ‘the transferee’.
This is a complex area of LTT and the guidance therefore makes specific reference to the relevant legislation.
LTTA/2210 Outline of legislation
Section 13 introduces Schedule 2 which contains provisions about pre-completion transactions. Unless otherwise specified, references to paragraphs in this guidance are to paragraphs of Schedule 2. The Schedule can be broken down into the following different areas.
|Paragraphs 1-5||Introductory provisions and key definitions|
|Paragraphs 6-11||Assignments of rights|
|Paragraphs 12-13||Free-standing transfers|
|Paragraphs 15-17||Minimum consideration rule|
|Paragraphs 18-20||Relief for the transferor|
Introductory provisions and key definitions
These paragraphs define a pre-completion transaction and make a distinction between assignments of rights and other pre-completion transactions (known as free-standing transfers). They also state that the transferee is not regarded as entering into a land transaction by reason only of the pre-completion transaction.
Assignments of rights
Paragraph 7 outlines how the transferee is treated in these cases. Broadly, the consideration for the transferee’s acquisition is whatever the transferee gives under the original contract, plus whatever the transferee gives for the assignment of rights.
The seller for the transferee’s acquisition is generally the original seller under the original contract, although there are exceptions to this general rule (see paragraph 11).
Paragraph 8 creates a ‘notional land transaction’ for the transferor under an assignment of rights (sub-paragraph 8(1)). If there are successive assignments, then there is also a notional ‘additional land transaction’ for each additional subsequent transferor in the chain (sub-paragraph 8(3)). Broadly, the consideration for a notional land transaction is any consideration given under the original contract by either the transferee or the transferor. For an additional land transaction, any consideration given by the buyer under the additional land transaction for the preceding assignment is also brought into charge.
Where the original contract is substantially performed but subsequently rescinded or annulled, the transferee’s position will be covered by the normal rules. Similar provision is made in paragraph 9 for a notional or additional land transaction within paragraph 8.
An assignment of rights may relate to only part of the land that is the subject-matter of the original contract. In such a case, paragraphs 7 and 8 apply as if the original contract were split into two contracts: one for the land that is subject to the assignment and one for the rest of the land (paragraph 10).
Paragraph 13 concerns the transferee. It adds any consideration given for the pre-completion transaction to the consideration otherwise given by the transferee. As for assignments of rights, the seller for the transferee’s acquisition is generally the original seller.
No special provision is made for the transferor. If the free-standing transfer is a sub-sale, then the original contract will be completed (or substantially performed) so the transferor will be the buyer under a land transaction as normal under the rules relating to contract and transfer. If the free-standing transfer is a novation, then there is no land transaction under which the transferor is the buyer, so the transferor has no need to file a return or claim relief.
The seller in linked transactions
Whether the transferee’s acquisition falls under the rules for an assignment of rights (paragraphs 6 – 11) or free-standing transfers (paragraphs 12 – 13) the seller will usually be the original seller, subject to certain exceptions.
Once the subject matter of the original contract has been transferred to the transferee (or in the case of an assignment of rights, once the original contract has been substantially performed) for the purposes of the linked transaction rules (section 8(1) of LTTA) the seller can be assumed to be both the seller in the original transaction, and any transferor in one or more pre-completion transactions relating to it. This will generally mean that, if the transferor and transferee are connected persons, then the linked transaction rules will apply to the original transaction and pre-completion transaction relating to it. Example 5, in section LTTA/2230 below, illustrates how this operates in practice.
Minimum consideration rule
The minimum consideration rule only applies where the ultimate buyer is either connected with, or not acting at arm’s length from, the transferor (or any other preceding transferor where there are successive pre-completion transactions). It can be ignored for all other transactions.
Where the rule applies, it can increase the consideration for the ultimate buyer’s acquisition. If either of 2 ‘minimum amounts’ is higher than the amount of consideration given by the normal rules, the consideration is increased to the higher minimum amount.
The first minimum amount is generally the amount due under original contract. The second minimum amount is given by a formula which includes the net amount given by each party (subject to certain exceptions) to the transactions.
Relief for the transferor
The transferor can claim full relief for its land transaction in certain circumstances. For relief to be available, the pre-completion transaction must be an assignment of rights or a sub-sale. There are separate reliefs for assignments (paragraph 18) and for sub-sales (paragraph 19). For a sub-sale, the original contract must be substantially performed or completed at the same time as and in connection with the substantial performance or completion of the sub-sale contract. Partial relief is available where the assignment or sub-sale relates to only part of the land that is the subject of the original contract. Relief must be claimed in a land transaction return, or an amendment to such a return. Please select the appropriate relief on the LTT return.
Relief is barred where the relief targeted anti-avoidance rule applies.
LTTA/2220 Registration of interest in land
A taxpayer is prevented from registering land acquired in most notifiable land transactions unless the person applying to have their interest registered produces a WRA certificate to HM Land Registry showing they have met their LTT obligations.
In a sub-sale, there will generally be 2 transfers of the land: A to B and B to C.
If B wishes to register its interest in the land, it will need to produce a WRA certificate together with its application for registration and the transfer from A to B, in the normal way.
If B does not wish to register its interest in the land, C will need to produce C’s WRA certificate, its application for registration and the transfers from A to B and B to C. With its application for registration, C should also either:
- Confirm in writing that B acquired the land from A and transferred it to C in pursuance of a ‘free-standing transfer’ for the purposes of Schedule 2 to the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017; or
- Produce written confirmation from B (or B’s agent) that B acquired the land from A and transferred it to C in pursuance of a ‘free-standing transfer’ for the purposes of Schedule 2 to the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017.
If there is only one transfer of the land – A to C – then C will only need to produce its WRA certificate, its application for registration and the transfer from A to C.
In an assignment of rights, there will be just one transfer of the land: A to C. In this case, C can register its interest in the normal way. The notional land transaction between A and B is notifiable for LTT purposes even though it is not an acquisition of a major or chargeable interest. There is no need for a letter confirming an assignment of rights. Only C’s WRA certificate is needed.
LTTA/2240 Options and rights of pre-emption
The acquisition of an option binding the grantor to enter into a land transaction or a right of pre-emption preventing the grantor from entering into a land transaction (or restricting their right) is also a land transaction.
When an option or right of pre-emption is granted, that land transaction is distinct from (but almost certainly linked to) the land transaction which is effected on the exercise of that option or right of pre-emption. The effective date of the transaction is the date of the grant of the option or right of pre-emption.
An option or right of pre-emption is not a major interest, although it is a chargeable interest.
An option to buy land is a right granted by the land owner to a prospective buyer to acquire the land. The option will often include the payment of a fee and set a time limit during which time that option will run. It is a right over land as the person granted the right can demand that the land be sold (to them).
A right of pre-emption is also known as a right of first refusal. The land owner must offer the property for sale to the holder of the right of pre-emption before offering it for sale to any other person.
Where an option has been granted, with consideration given for the grant of that option, and the option is exercised, the land transaction on the grant of the option and the land transaction on exercise of the option will be linked transactions.
(section 16 and paragraph 5 of Schedule 4)
An exchange (that is an exchange of interests in land) occurs when a land transaction is entered into by a person (alone or jointly) as buyer wholly or partly, in consideration of another land transaction that they (alone or jointly) enter as seller and the respective land transactions are in whole or part given as consideration for the other land. The 2 transactions are treated as separate and distinct from each other and are not linked transactions.
The rules for establishing the chargeable consideration given are available at LTTA/2260.
The rules in relation to a partition of land are available at LTTA/2360.
There are also special rules in relation to arrangements involving public or education bodies.