Land Transaction Tax alternative finance investment bonds relief: Technical guidance

(Schedule 11)

This relief is provided to ensure that land transactions that occur as a result of bonds being issued which are alternative finance investment bonds, do not incur LTT charges where bonds issued under typical interest-bearing bonds would not.

Bonds are issued as a way of financing a business. Frequently the bonds pay an income stream to the bond-holders. Bonds that do not pay interest are possible. These are known as alternative finance investment bonds. A bond issuer will arrange the issue of the bonds to bond-holders for the person seeking finance. In typical interest-bearing bonds there is no need for the bond-issuer to take control of any assets, although a charge may be taken over all or some of the assets of a company.

When a taxpayer wishes to issue bonds through an alternative finance investment bond so that interest is not paid to the bond-holders but a income from rents or other profits, the arrangements will be structured in a way that will require the bond-issuer to take control of an asset, for the purposes of LTT of land or buildings, in order to generate an income stream for the bond-holders, commonly rents.

There is therefore a need for the person seeking finance to transfer the asset, for LTT purposes land and buildings, to the bond-issuer. The bond-issuer will then grant a lease to the person seeking the finance. The first transfer or sale provides the person seeking finance with that finance, and the grant of the lease to the person seeking finance generates the income stream which will be passed onto the bond-holders. The bond-holders will have provided the bond-issuer with the assets to pay the funds to the person seeking finance (or compensate them for that transfer).

At the end of the term of the bonds (which can last for no longer than 10 years) the land and buildings transferred to the bond-issuer will be transferred back to the person who sought the finance.

As can be seen there are 3 land transactions:

• the property being transferred by the person seeking finance (the ‘seller’, and, the ‘original owner’) to a bond-issuer (‘the first transaction’ for alternative finance investment bonds relief)
• the lease granted by the bond-issuer to the person seeking finance out of the interest that has been transferred to it (on which sale and leaseback relief for the leaseback leg can be claimed, and
• on termination of the bond, the ownership of the property is transferred from the bond-issuer to the person seeking the finance  (‘the second transaction’ for alternative finance investment bonds relief).

(paragraph 2 of schedule 11)

‘Alternative finance investment bond’ means arrangements to which section 564G of the Income Tax Act 2007 apply.

‘Arrangements’ includes any agreement, understanding, scheme, transaction or series of transactions, or any of those things, whether or not legally enforceable.

‘Bond assets’, ‘bond-holder’, ‘bond-issuer’ and ‘capital have the meaning given in section 564G of the Income Tax Act 2007.

‘Qualifying interest’ means a major interest in land other than a lease for a term of 21 years or less.

(paragraph 3 of Schedule 11)

The bond-holder of an alternative finance investment bonds is not treated as having an interest in the bond assets; similarly, the bond-issuer under such a bond is not treated as a trustee of the bond assets.

(paragraph 4 of Schedule 11)

A bond holder under an alternative finance investment bond is treated as having an interest in the bond assets if control of the underlying asset is acquired by either the bond-holder or a group of connected bond-holders.

A bond-holder or group of connected bond-holders acquires control of the underlying asset if:

• the rights of the bond-holder under an alternative finance investment bond includes the right of management and control of the assets, and
• the bond-holder, or the group, acquires sufficient rights to enable them, or members of the group acting jointly, to exercise the right of management and control of the bond assets to the exclusion of any other bond-holder.

However, there are 2 cases where a bond-holder or group of bond-holders obtaining control of the underlying asset are not treated as having an interest in the underlying asset acquired.

The first case is where:

• at the time the bond-holder, or a group of connected bond-holders, acquired the rights they did not know, and had no reason to suspect, that they were in a position to exercise management and control over the bond assets, and
• as soon as practicably possible after they became aware of their ability to exercise control the bond-holder, or group of connected bondholders, transfer sufficient rights (the bonds) so that they no longer are able to exercise control.

The second case is where the bond-holder:

• underwrites a public offer of rights under the bond, and
• does not exercise the right of management and control of the bond assets.

The second case ensures that the bond-holder is not treated as having an interest in the underlying asset acquired where the person underwriting the issue of the bonds is required to acquire sufficient numbers of bonds, due to the issue not being sufficiently subscribed, that they are in a position to exercise control, but does not so exercise that control.

(paragraphs 5-12 of Schedule 11) 

There are 7 conditions that apply to the relief:

• Condition 1
  That the person seeking finance (‘A’) and the bond-issuer (‘B’) enter into arrangements where A transfers to B a qualifying interest in land (the ‘first transaction’) and both agree that B will transfer the interest to A when the interest ceases to be held as a bond asset.
• Condition 2
  That the bond-issuer enters into an alternative finance investment bond either before or after entering into the first transaction and the interest in land is held by the bond-issuer as a bond asset.
• Condition 3
  That in order to generate income or gains for the alternative finance investment bond, the bond-issuer and the person seeking finance enter into a leaseback agreement. The leaseback agreement is entered into if the bond-issuer grants a lease or sub-lease of the land to the person seeking finance.
• Condition 4
  That before the end of 120 days beginning with the effective date of the first transaction, the bond-issuer provides the WRA with prescribed evidence that a satisfactory legal charge has been entered on the title kept by the Chief Registrar.
  The ‘prescribed evidence’ is set out in The Land Transaction Tax (Administration) (Wales) Regulations 2018. The evidence is:
  • any document provided by the Chief Land Registrar confirming that a legal charge has been entered in the register of title in favour of the WRA, and
  • the UTRN for the return on which relief from tax was claimed in relation to the transaction where land was transferred from the original owner to the bond-issuer.
• Condition 5
  That before the termination of the bond, the total capital payments made to the bond-issuer is not less than 60% of the value of the interest in the land at the effective date of the first transaction.
• Condition 6
  That the bond-issuer holds the interest in land as a bond asset until the termination of the bond.
• Condition 7
  That once the interest in land ceases to be held by the bond-issuer as a bond asset, the interest is transferred to the original owner within 30 days (the ‘second transaction’). The second transaction must also be effected within 10 years of the first transaction.

(paragraph 13 of Schedule 11)

The relief can be claimed for the first transaction if it relates to an interest in land in Wales and conditions 1 to 3 above are met within 30 days of the effective date.

If the bond asset is replaced by another interest in land then this rule applies.

(Paragraph 14 of Schedule 11)

The relief is withdrawn if:

• the interest held by the bond-issuer is transferred to the original owner without conditions 5 and 6 being met
• the second transaction has not occurred within 10 years of the first transaction
• it becomes apparent that for any reason conditions 5 to 7 cannot or will not be met, or
• the charge has not been registered in favour of the WRA as set out in condition 4.

Where the relief is withdrawn, the amount of tax chargeable is based on the market value of the first transaction but without the claim to relief.

(paragraph 15 of Schedule 11)

The relief can be claimed for the second transaction if all 7 conditions are met and the taxpayer has complied with the provisions of the LTTA and TCMA in relation to the first transaction. That is, that the first transaction was the subject of a claim to relief and that a LTT return was made claiming that relief.

If the bond asset is replaced by another interest in land then this rule applies.

(paragraph 16 of Schedule 11)

If after the effective date of the second transaction the bond-issuer provides the WRA with the appropriate evidence that conditions 1 to 3 and 5 to 7 have been met, the land will cease to be subject to the charge registered by the Chief Land Registrar.

Where the charge is discharged, the WRA must notify the Chief Land Registrar of the discharge in accordance with their rules within 30 days of the bond-issuer providing the appropriate evidence to the WRA.

The ‘prescribed evidence’ is set out in The Land Transaction Tax (Administration) (Wales) Regulations 2018. The evidence is:  

• a statement from the bond-issuer, or a person authorised to act on behalf of the bond-issuer, that all of conditions 1 to 3 and 5 to 7 have been met
• the UTRN for the return on which relief from tax was claimed in relation to the transaction where land was transferred from the original owner to the bond-issuer
• the UTRN for the return on which relief from tax was claimed in relation to the transaction where land was transferred from the bond-issuer to the original owner, and
• any document as provided by the Chief Land Registrar confirming that the land has been registered in the name of the original owner.

(paragraph 17 of Schedule 11)

Relief for the first or second transaction is not available if the bond-holder, or a group of connected bond-holders, acquire control of the underlying asset (the bond asset).

A bond-holder or group of connected bond-holders acquires control of the underlying asset if:

• the rights of the bond-holder under an alternative finance investment bond include the right of management and control of the assets, and
• the bond-holder, or the group, acquires sufficient rights to enable them, or members of the group acting jointly, to exercise the right of management and control of the bond assets to the exclusion of any other bond-holders.

Relief in relation to the first transaction is not available if the bond-holder, or the group of connected bond-holders, acquires control of the underlying asset within 30 days of the effective date of the first transaction. In such a case if the return has not yet been made, the relief must not be claimed. In the event that the return has been made the taxpayer (the bond-issuer) may make an amendment to the return if made before the filing date for the return, or must make a further return within 30 days of the event that led to the relief being withdrawn.

Relief in relation to the first transaction is also withdrawn if the bond-holder or the group acquires control of the underlying asset at any time after the 30 day period following the effective date and conditions 1 to 3 have been met. In this case the taxpayer (the bond-issuer) must make a further return within 30 days of the event that led to the relief being withdrawn.

However, if control of the underlying asset is acquired by either the bond-holder, or a group of connected bold-holders, but either of 2 cases apply, the relief for the first or second transaction is still available and not withdrawn.

The first case is where:

• at the time the bond-holder, or a group of connected bond-holders, acquired the rights, they did not know, and had no reason to suspect, that they were in a position to exercise management and control over the bond assets, and
• as soon as practicably possible after they became aware of their ability to exercise control the bond-holder, or group of connected bondholders, transfer sufficient rights (the bonds) so that they no longer are able to exercise control.

The second case is where the bond-holder:

• underwrites a public offer of rights under the bond, and 
• does not exercise the right of management and control of the bond assets.

The second case ensures that the relief is not denied where the person underwriting the issue of the bonds is required to acquire sufficient numbers of bonds, due to the issue not being sufficiently subscribed, that they are in a position to exercise control, but does not so exercise that control.

(paragraph 18 of Schedule 11)

It is possible for the bond-holder to substitute one bond asset for another and for relief to still be claimable and not be withdrawn. The reason why land might need to be substituted is that a person seeking finance and having committed one property to be the underlying asset in an alternative finance investment bond, may at some point during the course of the period that the bond arrangements are in place, need the property for another purpose, including so that it can be sold.

Certain conditions must be met in relation to the land first used as the bond asset (the ‘original land’) and the land that is substituted for the original land (the ‘replacement land’).

Relief continues to be available in relation to the original land, and becomes available for the replacement land, if:

• conditions 1 to 3 and 7 are met in relation to the original land
• the bond-issuer ceases to hold the original land as a bond asset (and transfers it to the original owner) before the termination of the alternative finance investment bond
• the original owner and the bond-issuer enter into further arrangements falling within condition 1 relating to an interest in the replacement land, and
• the value of the interest in the replacement land at the time that it is transferred from the original owner to the bond-issuer is greater than or equal to the value of the interest in the original land at the time of the first transaction.

Where there is a substitution of land in an alternative finance investment bond it does not matter that condition 6 in relation to the original land will not be met (that the land is a bond asset until the termination of the bond) if conditions 1, 2, 3, 6 and 7 are met in relation to the replacement land.

In relation to the replacement land:

• condition 5 applies as if the reference to the interest in the land were a reference to the interest in the original land, and
• condition 7 applies as if the reference to the first transaction were a reference to the first transaction relating to the original land.

If the replacement land is in Wales, the original land ceases to be subject to the charge registered in pursuance of condition 4 when:

• the bond-issuer provides the WRA with the evidence that condition 7 is met in relation to the original land, and
• condition 4 is met in relation to the replacement land.

Where charge is discharged, the WRA must notify the Chief Land Registrar of the discharge of security within 30 days of the bond-issuer providing the appropriate evidence.

The ‘prescribed evidence’ is set out in The Land Transaction Tax (Administration) (Wales) Regulations 2018. The evidence is:

• the UTRN for the return on which relief from tax was claimed in relation to the transaction where land was transferred from the original owner to the bond-issuer
• the UTRN for the return on which relief from tax was claimed in relation to the transaction where land was transferred from the bond-issuer to the original owner, and
• any document as provided by the Chief Land Registrar confirming that the original land has been registered in the name of the original owner.

If the replacement land is not in Wales, the original land ceases to be subject to the charge registered with the Chief Land Registrar in pursuance of condition 4 when the bond-issuer provides the WRA with the prescribed evidence that:

• condition 7 is met in relation to the original land, and
• each of conditions 1 to 3 is met in relation to the replacement land.

Where charge is discharged, the WRA must notify the Chief Land Registrar of the discharge of security within 30 days of the bond-issuer providing the appropriate evidence.

The ‘prescribed evidence’ is set out in The Land Transaction Tax (Administration) (Wales) Regulations 2018. The evidence is:

• the UTRN for the return on which relief from tax was claimed in relation to the transaction where land was transferred from the original owner to the bond-issuer
• the UTRN for the return on which relief from tax was claimed in relation to the transaction where land was transferred from the bond-issuer to the original owner
• any document that proves that the replacement land is not in Wales and that conditions 1 to 3 in Part 3 of the Schedule have been met in relation to that land, and
• any document as provided by the Chief Land Registrar confirming that the original land has been registered in the name of the original owner. 

All of the rules above apply to further replacement land as they apply to replacement land.