V. Charles Ward addresses prospective tax liabilities in relation to a local authority development or investment purchase and how transactions can be structured in ways which minimises those liabilities.
A key driver in any development transaction is the need to make sure that it is structured in the most tax-efficient way possible for all parties. There are now many taxes which affect property transactions including: stamp duty land tax; VAT and Community infrastructure Levy. Each of these taxes becomes more complex year-by-year.
I believe that when acting for a client in a development purchase, it is too easy for a conveyancer just to stand back and tell the client to obtain specialist tax advice. Yes, in a multi-million pound development-transaction, advice from a specialist tax adviser has to be obtained before contracts are exchanged. But I also believe that as conveyancers we have to know enough about tax on development transactions to be able to ask the right questions. To be able to probe the advice received. And, from the outset, to be able to structure the transaction in a way which anticipates the tax advice which we are likely to receive. And not only when it comes to a development acquisition. There are also complex investment transactions in which we may be asked to become involved, particularly where there are a multiplicity of occupational tenants.
As conveyancers we stand at the interface between the local authority client and the tax adviser. Before contracts are exchanged, it is our job to make sure that the client is aware of prospective tax liabilities and can budget those liabilities in to the transaction cost. As conveyancers it is also our job to draft a stamp duty land tax return, claiming any reliefs which are appropriate, and presenting it to our client for approval before submission.
Too often in the past I have not trusted the tax advice which is in front of me. Sometimes it just appears too glib. Too superficial. Without explaining in practical terms how the transaction could be structured to minimize prospective tax liability.
Why is it that two different tax advisors can offer differing opinions on what tax reliefs can be claimed in what is substantially the same property transaction? Yes, the property addresses may be different. The development partners may be different. But the core substance of the transaction is the same. So why is it that one tax adviser tells me that registered social landlord relief can be claimed against stamp duty land tax, whilst another tells me that it can’t? I don’t just want to be told whether RSL relief does – or does not – apply. I want it explained to me.
In this article I review some of the tax issues which are relevant to development and the options for structuring the transaction in a way which minimises prospective tax liabilities.
A typical example might involve your council entering into an agreement with a development partner for the construction and purchase of 50 units of affordable housing. The total cost to the council for the development package is £10,000,000. But of that £10,000,000, £1,500,000 pounds is allocated to the land value and the remaining £8,500,00 to the construction cost. So what are the tax implications of that transaction?
It is not just about stamp duty land tax, although this may be the main tax consideration. There may be other taxes involved including VAT and community infrastructure levy. But let’s start with stamp duty land tax.
A key difference between councils and other social housing providers is that councils generally pay SDLT on their land purchases whereas other registered social landlords do not. But there are circumstances when councils can also qualify for RSL relief for a grant-funded development purchase. And it does not have to be 100% grant funded. And even if registered social landlord relief does not apply, there may be other blanket SDLT reliefs which may apply.
For example, a purchase made under the umbrella of a compulsory purchase order may qualify for blanket relief when it is intended that ownership will later be transferred by the council across to a development partner for demolition and/or reconstruction. The purposes of that CPO relief is to avoid the double-taxation which might otherwise apply on a back-to-back transaction.
If it can be confirmed that a blanket relief from SDLT applies to the substance of a property transaction, that would seem to me to be the end of the matter so far as SDLT is concerned. The SDLT return can be filed claiming that relief. But suppose it doesn’t qualify for one of the blanket SDLT reliefs?
It is then about structuring our £10,000,000 development purchase in a way which minimises potential SDLT liability. In particular we need to structure the transaction in a way which ensures that SDLT will only be charged on the £1.5M land value and not on the entire £10,000,000 cost of the development purchase.
For me the starting point has to be the Government’s Stamp Duty Land Tax Manual and in particular Section SDLTM04015 –‘Scope: How Much is Chargeable: Sale of Land with Associated Construction Costs-Para 10 Schedule 4 Finance Act 2003’. It deals with be chargeable consideration for SDLT when a vendor agrees to sell land to a purchaser and the vendor also agrees to carry out work, comprising works of construction, improvement or repair to the land sold. HMRCs view is that the decision in Prudential Assurance Co Limited v IRC  STC 863 applies for the purposes of SDLT. That decision involved identification of the subject matter of the transaction as regards stamp duty. It is necessary to identify the commercial substance of the transaction. Of relevance to the SDLT calculation is whether at the date of the land transfer, construction has yet to be started or is incomplete. The SDLT calculation will then be based on the value of the land at the date of transfer.
If that land transfer does not happen until after construction of the residential units is complete and they are ready for occupation, it must be assumed that stamp duty land tax would be paid on the entire £10,000,000 cost of the development purchase. It is why many development purchases provide for the land transfer to take place at a much earlier stage of the development. But simply bringing forward the date for completion of the land transfer is not of itself sufficient to guarantee that the transaction will benefit from reduced SDLT. There is another issue.
The HMRC Tax Manual warns that there may be cases where the Agreement for Sale of the land is so interlinked with the Agreement for Works that it is not capable of independent completion. The subject matter of the transaction for the purposes of SDLT will then be the works as completed and the chargeable consideration assessed on the entire £10,000,000 cost of the transaction. It is why, so far as possible, I try to split the land transaction from the construction contract, so that it is technically stand-alone and cannot be ‘unwound’ if there are issues relating to the subsequent construction. In practice I would seek simultaneous exchange of both the land contract and the construction contract to provide a complete and binding contractual package.
Perhaps the optimum time for completion of a land transfer is when construction of the dwellings has reached ‘golden brick’, which is when the foundations are in place and construction of the walls has begun. Golden brick is important because it is the point at which a new dwelling qualifies for the zero-rating for the purposes of VAT, even if that dwelling is still under construction. Such zero-rating is important if the bare land had previously been opted for tax and the buyer might have difficulty recovering its VAT outlay as an input, which is the case for many registered social landlords. When it comes to local authorities, the rules on recovery of VAT are particularly complex as they operate under different rules. The cost of getting it wrong may, for the local authority, go far beyond VAT payable on the development cost itself.
Claiming Multiple Dwelling Relief is another way in which councils can reduce the amount of SDLT payable on a development purchase of affordable housing. Applying MDR means averaging out the aggregate purchase price between the number of dwellings being bought and then calculating the SDLT applicable to each individual dwelling and then multiplying that calculation by the number of dwellings. The result will always be less than treating the aggregate purchase price as a single lump sum. However there will always be a minimum 1% levy on top of the 3% surcharge which local authorities, as corporate purchasers, will always pay on chargeable transactions. Where more than five dwellings are involved, the buyer can also elect to tax the entirety of the transaction on a non-residential basis.
V. Charles Ward is a Senior Property Lawyer with HB Public Law and is also the author of Housing Regeneration: a Plan for Implementation, published through Routledge.