Reliefs: Group Tax Bulletin article: paragraph 2(1): arrangements for change of control of purchaser
Paragraph 2(1) prevents a claim to group relief if arrangements are in existence at the time of the claim for a person (or persons together) to obtain control of the purchaser but not the vendor. Arrangements under paragraph 2(1) have to be in existence at the effective date of the transaction.
Where there is a change of control, paragraph 2(1) is intended to prevent avoidance of stamp duty land tax (SDLT) by passing property, or an economic interest in it, out of the group.
The statements of the Economic Secretary during debate in Parliament on the equivalent stamp duty provision in Finance Act 2000 are still relevant. The Economic Secretary said:
“I have received representations expressing concern about the blocking of relief for transfers from the company about to leave the group to another group member - in other words, when the company leaving the group is the transferor. I am persuaded that there are commercial situations in which an asset is transferred to another group company after arrangements are in place for the transferor company to leave the group. In a sense, therefore, the asset never leaves the original group. I am willing to make a concession for such cases, which will be useful to businesses, as their legal advisers have suggested.
I have some worry that it might be possible to construct avoidance devices from the concession, so I have asked the Stamp Office to monitor carefully the use of the relief. If the concession is abused, the Government will not hesitate to act swiftly.”
(see Hansard 18 July 2000, column 253)
HM Revenue & Customs (HMRC) will not argue that paragraph 2(1) denies group relief in cases where the transferor is to leave the group having transferred the land to other group members.
Furthermore, paragraph 2(1) does not apply if the arrangements that are in place are those for the acquisition of shares by a company under a reconstruction as long as the conditions in paragraph 2(1)(a), (b) and (c) are met. These are:
- that section 75 FA 1986 will apply to the acquisition and the conditions for relief under that section will be met;
- that after the acquisition the purchaser will be a member of the same group as the acquiring company.
Paragraph 2(2) of Schedule 7
Paragraph 2(2)(a) denies relief where there are arrangements under which considerationis to be provided or received (directly or indirectly) by a person other than a group company.
Where group relief is claimed HMRC will consider all of the facts and interpret paragraph2(2)(a) as not denying relief unless the loan finance is provided as part of a scheme to save SDLT when the property or an interest in it leaves the group.
For example, it is unlikely that there will be arrangements within paragraph 2(2)(a) if:
- the claim is not to be followed by a sale or underlease outside the group; or
- the claim is followed by a sale or underlease outside the group but SDLT is to be paid by the purchaser outside the group on consideration close to market value (or is deemed to be a grant of a lease under paragraph 11 of Schedule 17A FA 2003 see http://www.opsi.gov.uk/acts/acts2004/40012-cj.htm#sch39pt1), then again it is unlikely that relief will be prevented by paragraph 2(2)(a).
Loans from commercial lenders on ordinary commercial terms to facilitate the transfer between group members will also not normally disqualify a claim for the purposes of the arrangements test in paragraph 2(2)(a). For example, a claim can be accepted if:
- a specific loan is taken for the purchase of the asset; or
- the loan is secured on the asset; or
- arrangements are made to replace or novate an existing charge on the property transferred.
The three previous paragraphs above are limited to paragraph 2(2)(a) of Schedule 7.They do not mean that if other tests in paragraphs 1 and 2 of Schedule 7 are not met theclaim is acceptable.
When an enquiry is opened the case will be considered on their particular facts. Some examples of the type of circumstances which HMRC might want to examine in more detail during an enquiry are where the claim is part of (or is to be followed by):
- the creation or transfer of loan stock or equity capital;
- a capital reorganisation of the transferee;
- a guarantee by a third party not associated with the group;
- the creation of a new charge or financial arrangement whereby title to the property is, or may be, vested in the lender otherwise than in satisfaction of all or part of the debt; or
- the assignment of the freehold reversion or the intra-group lease to a person outside the group.
Other circumstances which can indicate that the claim is not admissible include where:
- all or part of the consideration for the transaction is to remain outstanding or is represented by intra-group debt, (as the aim and effect may be to reduce the value of the transferee company on a possible future sale outside the group); or
- the existing shareholders of the transferee include shareholders outside the group and the transaction is to be followed by the declaration of a dividend in specie, or by the liquidation of the transferee.