Land Transaction Tax reconstruction and acquisition reliefs: technical guidance

(Paragraph 2 of Schedule 17)

This relief allows land and buildings to be transferred between 2 companies as part of a transfer of an undertaking in exchange for shares, where there is no change of ownership, without any charge to LTT.

An example of a reconstruction of companies is where a company decides to split an existing business, which is carried on by one company, into 2 which is then carried on by 2 companies.

Relief must be withdrawn, and the land transaction assessed to the appropriate rates of LTT, if certain events occur.

On acquiring all or part of the undertaking that is, part of the business, of another company (the target company), in pursuance of a scheme for the reconstruction of the target company, the acquiring company, that is, the company acquiring the target company, may enter into a land transaction as part of, or in connection with, that scheme.

Where the 2 conditions are met, relief from LTT is available.

First condition

• the consideration for the acquisition consists wholly or partly of the issue of non-redeemable shares in the acquiring company, and
• the shares must be issued to all the shareholders of the target company.

Where the consideration consists partly of the issue of non-redeemable shares, this condition is only fulfilled if all of the balance of the consideration consists solely of the assumption or discharge, by the acquiring company, of liabilities of the target company (such as the acquiring company assuming the debts of the target company).

Second condition

After the acquisition has been made:

• the shareholders of the acquiring company are all shareholders of the target company and the shareholders of the target company are all shareholders of the acquiring company
• for each shareholder, the proportion of shares held in one company is the same (or as nearly as may be the same) as the proportion of shares held in the other company.

The only time the proportions do not have to match exactly is when there are insufficient shares of one company to allow the shareholders to match their proportions of shares in the other company. In this case, any reasonable disposition of the shares to allow matching as nearly as possible is acceptable (but so that control of one company is the same as control of the other company).

Such a situation may arise where the target company has more shares issued than the acquiring company. For example if the acquiring company has 100 shares whereas the target company has 1000 shares (with 3 shareholders one holding 334 and 2 holding 333 shares each), then the shareholding in the acquiring company being 34, 33 and 33 would be as nearly as possible to the shareholding in the target company, even though the shareholder with 34 shares has an increased interest in the acquiring company compared to their interest in the target company.

The reference to shareholders means that the relief is not available unless the target company has a share capital. It follows therefore that the relief is not available, for example, where the target or acquiring company is a company limited by guarantee, not having a share capital, or an unincorporated association.

Any shares that the target or acquiring company owns in itself, such as treasury shares acquired as a result of a share buyback, are to be treated as cancelled for the purposes of this relief. The company is therefore not treated as owning any shares in itself.

It should be noted that the relief is subject to the relief anti-avoidance rule.

(Paragraph 3 of Schedule 17)

On purchasing all or part of the undertaking of another company (the target company) the acquiring company (the company acquiring the target company) may enter into a land transaction as part of, or in connection with, the transfer of the purchased undertaking.

It applies where a property is transferred as part of the acquisition of an undertaking of another company in exchange for shares and no more than 10% cash.

Where the 3 conditions are met, LTT is chargeable in connection with the land transaction, entered into at a rate of 0.5%.

Relief must be withdrawn, and the land transaction assessed to the appropriate rates of LTT, if certain events occur.

First condition

The consideration for the acquisition consists wholly or partly of the issue of non-redeemable shares in the acquiring company. These shares must be issued to:

• the target company, or
• any or all of the shareholders of the target company.

Where the consideration consists partly of the issue of non-redeemable shares, this condition is only fulfilled if all the balance of the consideration consists of:

• cash which does not exceed 10% of the nominal value of the non-redeemable shares issued for the transaction
• the assumption or discharge, by the acquiring company, of liabilities of the target company, or 
• both of these things.

Second condition

The acquiring company must not be associated with any other company that is a party to arrangements with the target company relating to the shares issued to the target company as a result of the transfer of the undertaking.

Third condition

The undertaking or part of the undertaking of the target company that is acquired must not have as its main activity a trade that is wholly or mainly the dealing in chargeable interests.

The reference to shareholders means that the relief is not available unless the target company has a share capital. It follows therefore that the relief is not available, for example, where the target or acquiring company is a company limited by guarantee, not having a share capital, or an unincorporated association.

It should be noted that the relief is subject to the relief anti-avoidance rule.

(Paragraph 5 of Schedule 17)

Where reconstruction or acquisition relief has been claimed on a land transaction relief is withdrawn if control of the acquiring company changes:

• before the end of a period of three years beginning with the effective date of the relieved transaction, or
• in pursuance of, or in connection with, arrangements made before the end of a period of 3 years, beginning with the effective date of the relieved transaction

and, at the time that control of the acquiring company changes it, or a relevant associated company, holds a chargeable interest:

• that was acquired by the acquiring company under the relevant transaction, or 
• that is derived from the chargeable interest acquired by the acquiring company under the relevant transaction (for example if a headlease was acquired under the relevant land transaction, the reversion of a sublease granted out of that headlease would be a chargeable interest derived from the original chargeable interest), and
• that chargeable interest has not subsequently been transferred at market value by means of a chargeable transaction where reconstruction or acquisition relief was available but not claimed.

Control of a company changes when the company becomes controlled by:

• a different person
• a different number of persons
• 2 or more persons at least one of whom is not the person, or one of the persons, by whom the company was previously controlled.

Reconstruction and acquisition relief is withdrawn:

• if control of the acquiring company changes within 3 years of the transaction
• if there are arrangements put in place within that period which result in a change of control after the period of 3 years.

(Paragraph 6 of Schedule 17)

Reconstruction or acquisition relief is not withdrawn where control of the acquiring company changes as a result of:

• a share transaction effected in accordance with the rules relating to transactions in connection with divorce or dissolution of a civil partnership
• a share transaction effected in accordance with the rules related to the variation of testamentary dispositions etc.
• an exempt intra-group transfer. An ‘exempt intra-group’ transfer is a transfer of shares effected by an instrument which is exempt from stamp duty by virtue of section 42 Finance Act 1930 or Section 11 of the Finance Act (Northern Ireland) 1954 transfers of shares between associated companies. However, relief may be withdrawn following a subsequent non-exempt transfer
• a transfer of shares to another company in relation to which share acquisition relief applies. ‘Share acquisition relief’ is provided by section 77 Finance Act 1986.  However, relief may be withdrawn following a subsequent non-exempt transfer
• a loan creditor becoming, or ceasing to be, treated as having control of the company and the other persons treated as having control of the company before the loan creditor was so treated continue to, or would be, treated as having control.

As noted above 2 exceptions apply, meaning that relief is not withdrawn, but a subsequent non-exempt transfer occurs within the 3 year period, there are provisions which ensure that relief is then withdrawn at that time.

(Paragraph 7 Schedule 17)

There are 2 cases where a subsequent event can lead to the withdrawal in full or in part of the reconstruction or acquisition relief.

Case 1 – exempt intra-group transfer

Where relief has been claimed, and not withdrawn, on the basis that an exempt intra-group transfer has occurred but:

• a company that holds shares in the acquiring company (or that are derived from shares to which the exempt intra-group transfer relates) subsequently ceases to be a member of the same group as the target company, and that event occurs before the end of 3 years beginning with the effective date of the relieved transaction, or occurs after that date but is in connection with arrangements made within that 3 year period, and
• the acquiring company, or a relevant associated company, holds a chargeable interest that was acquired by a relieved transaction, or, that is derived from such a chargeable interest, and that chargeable interest has not subsequently been transferred at market value by means of a chargeable transaction where reconstruction or acquisition relief was available but not claimed.

Case 2 – share acquisition relief applied

Where relief has been claimed, and not withdrawn, on the basis that there has been a change of control of the acquiring company as a result of a transfer to which share acquisition relief applies but:

• control of the other company changes when that company holds shares transferred to it by the transfer to which share acquisition relief applied, or any shares derived from the shares transferred and, before the end of 3 years beginning with the effective date of the relieved transaction, or occurs after that date but is in connection with arrangements made within that 3 year period, and
• the acquiring company, or a relevant associated company, holds a chargeable interest that was acquired by a relieved transaction, or, that is derived from such a chargeable interest, and that chargeable interest has not subsequently been transferred at market value by means of a chargeable transaction where reconstruction or acquisition relief was available but not claimed. 

The effect is to withdraw relief when the chargeable interest originally with the target company could (but does not have to) come under control of someone outside the group as a result of a company originally in the group (and which holds shares in the acquiring company) leaving the group.

(Paragraph 7 Schedule 17)

Reconstruction or acquisition relief in relation to the relevant land transaction (or an appropriate proportion of it) is withdrawn and LTT becomes chargeable.

Where it is necessary to withdraw reconstruction or acquisition relief, the amount of relief withdrawn depends on:

• the chargeable interest obtained by the buyer on the effective date of the original land transaction
• the chargeable interest held by the buyer (and any relevant associated company) at the time of the event causing withdrawal of relief.

The effect of the withdrawal of relief is to tax the chargeable interest remaining with the buyer (and any relevant associated company) as if no claim to reconstruction or acquisition relief had been made.

The LTT payable is that which would have been payable in respect of the original land transaction for which reconstruction or acquisition relief was claimed.

The chargeable consideration for the transaction is calculated as the market value of the chargeable interest transferred by the original land transaction.

This is modified where the chargeable interest held by the purchaser (and any relevant associated company) at the time reconstruction or acquisition relief is withdrawn is not the same as the chargeable interest transferred by the original land transaction.

In this case, the LTT payable is that which would have been payable in respect of an appropriate proportion of the original land transaction for which relief was claimed.

The appropriate proportion is the fraction of the market values of the chargeable interests held by the acquiring company (as buyer) and any relevant associated companies at the time of withdrawal of reconstruction or acquisition relief, calculated by reference to the effective date of the relevant land transaction, and in relation to the market value of the chargeable interests obtained by the acquiring company (as buyer) at the effective date of the relevant land transaction.

(Paragraph 8 schedule 17)

Once the LTT payable as a result of a withdrawal of reconstruction or acquisition relief has been determined (whether by passage of time or closure of an enquiry or otherwise), liability to pay the tax is the responsibility of the acquiring company.

Where such tax (or any part of it) has not been paid within a period of 6 months of the date on which it became payable, recovery of the unpaid amount is possible from other persons.

The persons from whom the LTT may be recovered are:

• a company which at any relevant time was a member of the same group as the acquiring company and was above it in the group structure. For these purposes:
  • any relevant time means any time between the effective date of the relevant transaction and the date of change of control by virtue of which tax is chargeable, and 
  • a company (A Ltd) is above another company (B Ltd) in a group structure if B Ltd (or another company that is above B Ltd in the group structure) is a 75% subsidiary of A Ltd
• any person who at any relevant time was a controlling director of the acquiring company or of a company having control of the acquiring company. For these purposes:
  • any relevant time means any time between the effective date of the relevant transaction and the date of change of control by virtue of which tax is chargeable
  • director (in relation to a company) has the meaning given by section 67(1) Income Tax (Earnings and Pensions) Act 2003 and includes any person falling within section 452(1) Corporation Tax Act 2010
  • controlling director (in relation to a company) means a director of the company who has control of the company in accordance with sections 450 and 451 Corporation Tax Act 2010.

(Paragraph 9 schedule 17)

To enable such a recovery, a notice must be served on the person from whom the tax is to be recovered. The notice:

• requires the unpaid amount of tax to be paid within 30 days of the service of the notice
• must be served before the end of the period of 3 years beginning with the date on which the tax was finally determined
• must state the amount of tax to be paid by the person on whom it is served
• is to be treated as if it were an assessment and the tax was due from the person on whom it was served
• has effect for recovery of the tax and any interest on the unpaid tax and also for the purposes of appeals.

When the person on whom a notice was served has paid the tax (and interest), that person is legally entitled to recover the amount they paid from the acquiring company (as buyer).

The following definitions are relevant:

• companies are associated if one has control of the other or both are controlled by another person or persons. Control is defined in accordance with sections 450 and 451 of the Corporation Tax Act 2010
• arrangements includes any scheme, agreement or understanding whether or not legally enforceable
• relevant associated company for the purposes of withdrawal of reconstruction or acquisition relief, is a company:
  • that is controlled by the acquiring company immediately before the control of that company changes
  • of which control changes in consequence of the change of control of the acquiring company
• loan creditor has the meaning in section 453 of the Corporation Tax Act 2010
• non-redeemable shares means shares that are not redeemable
• relieved transaction means a transaction that is relieved from tax by a claim to reconstruction relief or on which tax is chargeable at the rate provided for by acquisition relief
• trade has the meaning given in section 1119 of the Corporation Tax Act 2010.

Meaning of an undertaking

The term ‘undertaking’ refers to the business, trade or enterprise of the target company which is transferred to (and is then carried on substantially unchanged by) the acquiring company. For there to be an undertaking it is implicit that some business must be carried on.

Business

The WRA considers that a ‘business’ includes ‘every trade, occupation or employment’, so ‘business’ is a very wide term embracing almost every common activity and is much wider than ‘trade’ or ‘profession’ alone.

The carrying on of a business ‘usually calls for some activity on the part of whoever carries it on’ (Lord Diplock in American Leaf Blending Co. v Director General, Privy Council 1978).

It can include a business of making investments where these investments are ‘actively managed’. As the Special Commissioner said in Martin & Another v CIR (SPC5/1995): ‘The mere receipt of rents from let property owned by an individual ‘raises no presumption that he is carrying on a business’ [per Lord Diplock in American Leaf], but where it can be shown that there is a continuing activity on what seems... to have been sound business principles …’it is likely that'…mere ownership or mere investment…’ may have become a business.

Part of undertaking

Whether the assets transferred comprise part of the undertaking of the target company, is largely a question of fact. If what is transferred is capable of existing on its own as a viable ‘business’ then it might comprise part of an undertaking, however, the mere partition of assets or investments is unlikely to be sufficient.