Stamp duty land tax rebate may be on cards for landlords
OWING to HMRC recently changing its practice on “transfer of a going concern” (TOGCs) in certain circumstances, some investors may be eligible for a stamp duty land tax (SDLT) rebate. The concept of what constitutes a VAT TOGC has been widened to include transfers of property rental businesses which involve the seller retaining a small, reversionary interest in a property. Consequently, VAT may have been levied on the transfer of business assets in cases where it should not have been, causing an inflated SDLT charge.
In the VAT and SDLT arena, TOGCs are prized assets and can present real VAT savings for some purchasers who either can’t VAT register or who have a low level of VAT recovery. SDLT is always a real cost so any reductions are most welcome from the perspective of all purchasers.
Additionally, there are cash flow benefits for those who can recover their VAT costs in full as they will not have to pay VAT in the first instance as TOGCs are outside the scope of the tax.
An example often used to assist the understanding of what constitutes a TOGC would be the sale of a letting business from one landlord to another, and in which the tenant or tenants remain in occupation of the property for some time after the freehold of the property has been transferred.
In a recent case that went to a tribunal, a property development company granted a lease of 125 years less three days to a purchaser and the lease was granted with the benefit of a prospective tenant. HMRC argued that the whole of the developer’s interest had not been transferred and refused to accept that the transaction constituted a TOGC.
The First Tier Tribunal looked at the substance of the transaction and found that, although the developer retained the headlease, its interest in a three day reversion and the small economic interest that it represented in no way altered the substance of the transaction. The FTT held that the substance of the transaction was to put the transferee business in a position where it was able to continue the previous lettings business of the developer. HMRC has now changed its practice on TOGCs.
HMRC’s response has been to say that it “will accept that a reversion retained by the transferor is sufficiently small for TOGC treatment to be capable of applying if the value of the interest retained is no more than one per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge)”.
It added: “Where more than one property is transferred at one time, this test should be applied on a property by property basis rather than for the entire portfolio.
“If the interest retained by the transferor represents more than one per cent of the value of the property, HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC.”
The outcome of this is that TOGCs involving investors in transfers of letting businesses may be able to seek rebates of SDLT as well as VAT, as the amount of SDLT payable is calculated on the consideration paid plus any VAT levied on that consideration. VAT that was overcharged by the seller would be repayable to the purchaser and this could be a real benefit where the purchaser could not recover any VAT or only a small amount of the VAT that it was charged on the transfer.
Now there is an opportunity to claim TOGC treatment retrospectively where an opted property has been sold in similar circumstances. HMRC has claimed that it will be satisfied where the parties can provide satisfactory evidence that the proper TOGC treatment was considered at the time of the transfer. This could be in board meetings or solicitors’ letters so you may be in for a windfall.
Brian Birt is a senior tax consultant with Garbutt and Eilliott, www.garbutt-elliott. co.uk