by Caitiona Leahy, Commercial Property Unit
In any reasonably sižed commercial property transaction, stamp duty at the top rate of 9% will apply. Accordingly, structuring any such transaction in a tax efficient manner is of key importance in order to minimise or avoid any liability to stamp duty. However, tax planning can carry with it certain risks, which should be weighed against the likely tax savings and accordingly, legal advice should be sought. One way of avoiding liability to stamp duty is by entering into a sub-sale arrangement and thereby availing of the stamp duty relief available.
What is a sub-sale?
A sub-sale is, in effect, a chain of sales, with only one transfer taking place from the original vendor to the final purchaser.
What is sub-sale relief?
Structuring a property transaction as a sub-sale can eliminate a stamp duty liability, as sales of many types of property, including land, are not liable to stamp duty at contract stage, but only when a transfer is effected. Sub-sale relief can best be illustrated by the following example:
A landowner contracts to sell land to a developer. No transfer is executed on foot of this contract and the developer develops the land and contracts to sell the units erected to second purchasers. If the developer directs the landowner to execute transfers of the units in favour of the second purchasers, stamp duty will only be payable on those transfers at the rate applying to the purchase price passing between the developer and the second purchasers. This arrangement is commonly known as “resting in contract” and the relief available to it can be very beneficial to the developer, as he incurs no stamp duty liability on the initial contract. Only the ultimate purchasers will be subject to stamp duty at the rates applicable to the transfers of the developed units. In many cases these purchasers will be able to avail of first time buyer/owner occupier relief, giving rise to little or no stamp duty being payable.
Some difficulties/risks associated with sub-sale relief
To avail of a sub-sale arrangement, the consent and co-operation of the original vendor are required. Indeed, this may provide an opportunity to a vendor to get the purchaser to share any tax saving.
Where a developer has agreed to purchase land, but intends to dispose of it by way of sub-sale, the developer may have to pay the full price up front. This puts the developer in the precarious position of having paid the purchase price without the security of taking title to the land. Moreover, his risk exposure is further intensified if the developer then incurs large expenditure on developing the land.
If a developer is borrowing to fund the development the lender may not be satisfied with the security being provided where the developer does not hold legal title to the land. However, with the co-operation of the landowner and with good advice, this can be addressed.
If the original vendor dies or becomes of unsound mind and incapable of managing his affairs, meaning that he is no longer in a position to execute transfers in favour of the ultimate purchasers, this can lead to costly delays in resolving such issues and completing these transactions, rendering the developer potentially in breach of his contractual arrangements with such purchasers.
Changes introduced by Finance Act 2007
Section 110 of Finance Act 2007 has introduced certain anti-avoidance measures, which have yet to come into effect and will only do so by way of Ministerial Commencement Order. One of these measures eliminates the resting in contract arrangement as a stamp duty planning technique. Under this new measure, where a vendor receives 25% or more of the purchase price for the sale of land, but a transfer is not effected within 30 days of the 25% threshold being reached, the contract will be stampable as if it were a transfer of land.
A purchaser needs to be aware of the risks involved in structuring a transaction with a landowner. But with careful planning and mindful of the consequent risks, a purchaser can currently in certain circumstances eliminate stamp duty on the acquisition of land.
However, the future of sub-sale relief and resting in contract transactions will depend on whether Section 110 is enacted and the manner and timing of such enactment. However, the relief is still available and serious consideration should be given to availing of it.