Section 123 and Schedule 61: Alternative Finance Investment Bonds
Summary
1.Section 123 and Schedule 61 facilitate the issue of alternative finance investment bonds based on real property. They ensure that disposals and acquisitions of real property in connection with such bonds do not incur liabilities to stamp duty land tax (SDLT) or tax in respect of chargeable gains and entitlements to capital allowances are preserved. They have effect from the date of Royal Assent.
Details of the Section
2.Section 123 provides for Schedule 61 to have effect in relation to relief from taxation of chargeable gains, SDLT, and capital allowances in connection with alternative finance investment bonds.
Details of the Schedule
3.Paragraph 1(1) of the Schedule provides that terms used in the Schedule have the same meaning as in section 48A of the Finance Act (FA) 2005, which deals with alternative finance investment bonds. This sub-paragraph also explains that references in the Schedule to “prescribed evidence” mean evidence prescribed in regulations made by HM Revenue & Customs (HMRC). It also defines a qualifying interest as “a major interest in land”. The only exclusion is a lease of 21 years or less.
4.Paragraph 1(2) provides that, unless it is clear from the context that this is not the case, any expressions used in the Schedule which are also used in Part 4 of FA 2003 (which deals with SDLT) shall have the same meanings in both places.
5.Paragraph 2 provides an exemption from SDLT for alternative finance investment bonds by ensuring the tax treatment of the bonds is the same as that provided within section 48B(2) of FA 2005 for income tax and capital gains tax (CGT).
6.Paragraph 3(1) states that the tax treatment of alternative finance investment bonds provided at paragraph 2 is not available where a bond-holder, or a group of connected bond-holders, acquires control of the underlying asset.
7.Paragraph 3(2) explains the circumstances in which it may be possible for a single bond-holder, or a group of connected bond–holders, to acquire control of the underlying asset.
8.Paragraph 4 provides two exclusions from paragraph 3.
9.Paragraph 4(2) provides the first exclusion, which applies where, at the time the rights under the bond were acquired, a bond-holder, or all of a group of connected bond-holders, did not know or had no reason to suspect that the bonds enabled the exercise of the rights of management and control of the bond assets and, having subsequently become aware of the rights attached to the bonds, the bond-holder(s) transferred sufficient bonds, as soon as reasonably possible so that they could no longer exercise such control.
10.Paragraph 4(3) provides for the second exclusion which is available for persons acting as underwriters of the bond issuance providing they do not exercise control and management of the bond asset.
11.Paragraph 5(1) introduces 7 conditions (conditions A to G) for the application of paragraphs 6 to 18 of the Schedule to provide relief from SDLT and tax on chargeable gains and to determine the treatment for capital allowances purposes. This sub-paragraph also provides that paragraphs 20 and 22 of the Schedule can prevent these reliefs even if all 7 conditions are satisfied.
12.Sub-paragraph (2) provides condition A. This is that a person (“P”) transfers a qualifying interest in land to another person (“Q”) and P and Q agree that at a later time (when Q ceases to hold that interest as a bond asset in relation to an alternative finance investment bond of which Q is the issuer) Q will transfer that interest to P. The transfer of the qualifying interest to Q is described in the Schedule as “the first transaction”.
13.Sub-paragraph (3) provides condition B. This is that Q acts as bond issuer in relation to an alternative finance investment bond, and holds the interest in land as a bond asset.
14.Sub-paragraph (4)(a) provides condition C. This is that Q and P enter into a “leaseback agreement” to generate income and gains for the alternative investment bond.
15.Sub-paragraph (4)(b) provides that HM Treasury may, by regulations extend the scope of condition C to include financing structures other than those involving a sale and leaseback.
16.Sub-paragraph (5) explains what is meant by “leaseback agreement” in condition C. This is that Q grants P a lease or sublease out of the interest acquired in the first transaction. The sub-paragraph includes provision to ensure that the equivalent transactions under Scottish land law also constitute a leaseback agreement.
17.Sub-paragraph (6) provides condition D. That is that, the bond issuer (Q) is required to provide prescribed evidence that a satisfactory legal charge has been entered on the Land Register. The evidence needs to be provided to HMRC within 120 days of the first transaction. “Prescribed evidence” is evidence prescribed by regulation made by HMRC.
18.Sub-paragraph (7) provides rules relating to the charge over the land referred to in sub-paragraph 6.
19.Sub-paragraph (8)(a) provides that the amount of the charge is to include the amount of SDLT that would be due on the market value of the transfer of the interest at the date of the transfer.
20.Sub-paragraph (8)(b) provides that the charge also includes any interest and penalties that would be payable if the tax has been due (but not paid) on the first transaction.
21.Sub-paragraph (9) provides condition E. This is that, over the life of the alternative finance investment bond, Q receives payments of capital of at least 60 per cent of the value of the interest in land at the time of the first transaction. The purpose of condition D is to ensure that the main use of the interest in land is as a bond asset.
22.Sub-paragraph (10) provides condition F. This is that throughout the life of the alternative finance investment bond Q holds the interest in land as a bond asset.
23.Sub-paragraph (11) provides condition G. This is that at the termination of the bond, when the interest in land ceases to be a bond asset, the interest is transferred to P by Q (this transfer is described as “the second transaction”), and that the second transaction takes place no later than 10 years after the first transaction. This effectively puts a term of 10 years on the alternative finance investment bond.
24.Sub-paragraph (12) provides that the period of 10 years referred to in condition G can be altered by Treasury regulation.
Stamp duty land tax: first transaction
25.Paragraph 6(1) sets out the requirements for relief from SDLT on the first transaction. These are that the interest acquired is of land in the UK and that each of the conditions A to C are met within 30 days of the date of the transfer of interest in land from P to Q.
26.Paragraph 6(2) provides that where the requirements in this paragraph are satisfied the first transfer from P to Q is exempt from SDLT.
27.Paragraph 6(3) provides that the relief is subject to conditions relating to asset substitution at paragraph 18.
28.Paragraph 6(4) provides that relief on the first transaction is also subject to the provisions of paragraph 20 which provides that relief on the first transaction is not available where a bond-holder, or group of connected bond-holders, acquires control of the underlying asset.
29.Paragraph 7 details the circumstances where the relief on the first transaction will be withdrawn.
30.Paragraph 7(1)(a) provides for the first circumstance, where the asset is returned to P but the requirement to issue bonds to the value of 60 per cent of the asset is not satisfied and the asset is not held as a bond asset until the termination of the bond.
31.Paragraph 7(1)(b) provides that the relief is also withdrawn where a period of ten years has elapsed since the first transaction without conditions E and F having been satisfied.
32.Paragraph 7(1)(c) provides that relief is also withdrawn if at any time it becomes evident that any of conditions E to G cannot or will not be fulfilled.
33.Paragraph 7(2) provides that relief is also withdrawn where Q fails to provide prescribed evidence to HMRC that they have registered a charge within 120 days of the transaction (see above).
34.Paragraph 7(3) provides that if any of the circumstances set out in paragraphs 7(1) and (2) apply then the first transaction is no longer exempt from SDLT.
35.Paragraph 7(4) provides that the amount of SDLT chargeable is the tax that would have been charged on the market value of the interest transferred and paragraph 7(5) provides the time from which interest is due in respect of that amount.
36.Paragraph 7(6) provides that Q is also required to deliver a further land transaction return within 30 days of the date on which the relief is withdrawn.
37.Paragraph 7(7) provides that the return must include a self–assessment of the amount chargeable to tax in respect of the first transaction.
38.Paragraph 7(9) provides that the requirements of Schedule 10 to FA 2003 and section 76 of that Act are modified for the purposes of this Schedule with the transaction being the event which triggered withdrawal of the relief and the effective date of transaction being the date of the withdrawal of the relief.
Stamp duty land tax: second transaction
39.Paragraph 8 provides relief from SDLT on the transfer of the land asset from Q back to P.
40.Paragraph 8(1) provides that the transfer of the land back to P is exempt if conditions A to G have been met and all the provisions of Part 4 of FA 2003 relating to the first transaction have been complied with.
41.Paragraph 8(2) provides that the relief is subject to conditions relating to asset substitution in paragraph 18.
42.Paragraph 8(3) provides that relief is not available in respect of the second transaction if paragraph 20 applies because a bond-holder or group of connected bond-holders acquires control of the underlying asset.
43.Paragraph 9 provides that if following the transfer of the land asset back from Q to P, Q provides prescribed evidence that conditions A to C and E to G have been met then the land ceases to be subject to a charge.
Taxation of capital gains
44.Paragraph 10 provides relief from charges under the Taxation of Chargeable Gains Act 1992 (TCGA) in respect of the first transaction and any leaseback agreement between Q and P, provided that certain of the conditions in paragraph 5 are satisfied.
45.Paragraph 10(1) states that the paragraph applies if conditions A to C in paragraph 5 (see paragraphs 12 to 16 above) are all satisfied within 30 days of the effective date of the first transaction. This condition is the same as that in paragraph 6(1)(b) in respect of SDLT.
46.Paragraph 10(2) provides the relief in respect of the first transaction. The first transaction is not treated for the purposes of the TCGA as a disposal by P or an acquisition by Q. In general, tax is charged under TCGA only if chargeable gains arise on the disposal of assets, so the provision that there is no disposal prevents a charge from arising.
47.Paragraph 10(3) similarly provides that if condition C is satisfied by Q and P entering into a leaseback agreement, the granting of a lease or sub-lease in the leaseback agreement is not regarded for TCGA purposes as a disposal of an interest in the land by Q or an acquisition by P.
48.Paragraph 10(4) provides that sub-paragraphs (2) and (3) are subject to paragraph 11, which provides for withdrawal of the relief if any of conditions D to G are not met.
49.Paragraph 10(5) provides that, if the interest in land ceases to be the bond asset but is replaced by an interest in other land, paragraph 10 is subject to paragraph 18, and sub-paragraph (6) provides that paragraph 10 is also subject to paragraph 20 (see paragraphs 93 to 95 below).
50.Paragraph 11 effectively withdraws the special treatment provided by paragraph 10, if any of conditions D to G are not satisfied.
51.Paragraph 11(1) provides three circumstances in which the paragraph applies. These are that:
Q transfers the interest in land back to P without conditions E and F having been met;
the period specified in condition G (under paragraph 5(11)(b) this is currently 10 years, but can be changed by regulations) expires without both condition E and condition F being satisfied; or
it becomes clear at any time that one or more of conditions E to G cannot or will not be satisfied.
52.Paragraph 11(2) provides for the paragraph to have effect in one other circumstance. This is that the interest in land that is the subject of the first transaction is an interest in land in the UK, but Q fails to provide evidence of a charge over the land as required by Condition D.
53.Paragraph 11(3) provides that where paragraph 11 has effect, the disregards for TCGA purposes of the first transaction and the grant of the lease or sub-lease do not apply. The effect of this is that these transactions can constitute disposals and acquisitions for TCGA purposes, so that chargeable gains or losses may arise. Any gains or losses are computed as they would be if the transactions had not been disregarded.
54.Paragraph 11(4) provides that any chargeable gains or losses that result from the application of sub-paragraph (3) do not arise for tax purposes at the time of the actual transactions (the first transaction, or the grant by Q to P of the lease or sub-lease). The exact time when they arise is determined by the conditions that result in the application of sub-paragraph (3):
where sub-paragraph (3) applies because the interest in land is transferred from Q to P without one or both of conditions E or F being satisfied, the chargeable gain or loss arises immediately before the transfer of the interest from Q to P;
where sub-paragraph (3) applies by virtue of either of the conditions in the second and third bullets of paragraph 51 of this note, the chargeable gain or loss arises at the time mentioned in the relevant condition; and
where sub-paragraph (3) applies by virtue of the failure to provide evidence of a charge over land located in the UK, the chargeable gain or loss arises at the expiry of the time allowed under condition D.
55.Paragraph 12 provides relief from tax under TCGA in respect of the second transaction.
56.Paragraph 12(1) provides that the second transaction is not regarded for TCGA purposes as a disposal by Q and an acquisition by P if:
conditions A to C and E to G are satisfied; and
if the relevant land is in the UK, condition D is also met.
Capital allowances
57.Paragraph 13(1) explains that paragraphs 14 to 17 set out the treatment of alternative finance investment bonds for the purposes of the capital allowances legislation.
58.Paragraph 14 sets out the treatment for capital allowances purposes of plant and machinery or industrial buildings used for alternative finance investment bonds.
59.Sub-paragraph (1) provides that paragraph 14 applies to transactions falling within the conditions A to C set out in paragraph 5.
60.Sub-paragraph (2) provides that paragraph 14 only applies to assets that are either plant or machinery or an industrial building (or part of an industrial building).
61.Sub-paragraph (3)(a) provides that the expenditure by Q on acquiring the asset is not capital expenditure for the purposes of CAA.
62.Sub-paragraph (3)(b) provides that, for the purposes of CAA, Q is not treated as becoming the owner of the asset, instead P is to be regarded as continuing to be the owner of the asset.
63.Sub-paragraphs (4) and (5) provide that the treatment of the assets for the purposes of CAA is not affected by the leaseback agreement entered into by Q and P nor by the second transaction.
64.Paragraph 15 provides rules for the case where the asset held for the purposes of the bond is lost or destroyed.
65.Sub-paragraph (2) states that the first condition is that the asset is plant or machinery that was part of the subject matter of the first transaction.
66.Sub-paragraph (3) states that the second condition is that, whilst the asset is held as a bond asset, it is either permanently lost or ceases to exist.
67.Sub-paragraph (4) provides that if the conditions are met then for the purposes of CAA there is a disposal event for P in the period in which the loss occurs or the asset ceases to exist.
68.Sub-paragraph (5) sets out the disposal value that P is required to bring into account for the purposes of CAA.
69.Paragraph 16 sets out the treatment for the purposes of CAA where Q retains the asset, but no longer holds it as a bond asset.
70.Sub-paragraph (2) states that the first condition is that the asset is plant or machinery, or an industrial building (or part of an industrial building), that was part of the subject matter of the first transaction.
71.Sub-paragraph (3) states that the second condition is that Q retains the asset after ceasing to hold the asset as a bond asset.
72.Sub-paragraph (4) states that where the conditions are satisfied, Q is treated for the purposes of CAA as becoming the owner of the asset and P is treated as ceasing to be the owner of the asset.
73.Sub-paragraph (5) states that in the chargeable period for P in which Q ceases to hold the asset as a bond asset, P is treated as having disposed of the asset.
74.Sub-paragraph (6)(a) states that P is required to bring into account as the disposal value, the market value of the plant or machinery at the time of the transfer.
75.Sub-paragraph (6)(b) states that P is treated as receiving as the proceeds of the balancing event, for the purposes of industrial buildings allowances, the market value of the asset.
76.Paragraph 17 sets out the treatment for the purposes of CAA where Q transfers the asset to a third person.
77.Sub-paragraph (2) states that the first condition is that the asset is plant or machinery, or an industrial building (or part of an industrial building), that was part of the subject matter of the first transaction.
78.Sub-paragraph (3) states that the second condition is that Q transfers the asset to any other person than P.
79.Sub-paragraph (4) states that at the time that Q transfers the asset, the other person is treated for the purposes of CAA as becoming the owner of the asset and P is treated as ceasing to be the owner of the asset.
80.Sub-paragraph (5) states that in the chargeable period for P in which Q ceases to hold the asset as a bond asset, P is treated as having a disposal event in respect of plant or machinery or a balancing event in respect of an industrial building (or part of an industrial building).
81.Sub-paragraph (6)(a) states that P is required to bring into account as the disposal value, the market value of the plant or machinery at the time of the transfer.
82.Sub-paragraph (6)(b) states that P is treated as receiving as the proceeds of the balancing event, for the purposes of industrial buildings allowances, the market value of the asset.
Supplementary
83.This section of the Schedule explains:
the conditions that need to be satisfied for the relief to remain available if an asset is substituted; and
the circumstances in which relief may be denied where a bond–holder, or a group of connected bond-holders, acquires control of the asset.
84.Paragraph 18 provides rules for the case where the interest in land that was subject of the first transaction ceases to be a bond asset (before the termination of the bond) and is replaced as bond asset by an interest in other land. These rules allow such a substitution of bond assets to take place without disturbing the reliefs under paragraphs 6 to 17.
85.Sub-paragraph (1) lists the circumstances in which the paragraph applies. These are that:
conditions A to C and G are met in relation to an interest in land (described as “the original land”), so that the interest in land is transferred from Q to P (condition G) at some time after conditions A to C have been satisfied;
the interest in land ceases to be held by Q as a bond asset and hence is transferred by Q to P before the termination of the life of the bond;
P and Q enter into further arrangements that fall within paragraph 5(2) (condition A) in relation to an interest in other land (described as “the replacement land”); and
the value of the replacement land when transferred from P to Q is at least as great as the value of the interest in the original land at the time of the first transaction.
86.Sub-paragraph (2) provides modifications to the application of paragraphs 6 to 17 to the original land and the replacement land. The purpose of these modifications is that the replacement land is able to become the bond asset in place of the original land, without disturbing the effects of paragraphs 6 to 17 in relation to the relevant alternative finance investment bond arrangements. The modifications in respect of the original land are in sub–paragraph (3), and those in respect of the replacement land in sub–paragraph (4).
87.Sub-paragraph (3) provides that condition F (the requirement that Q should hold the original land as a bond asset throughout the life of the bond) need not be met in relation to the original land, provided that conditions A, B, C, F and G (taking account of the modifications made by sub-paragraph (4)) are met in relation to the replacement land.
88.Sub-paragraph (4) provides that following the substitution of the replacement land for the original land:
condition E continues to apply by reference to the value of the original land at the time of the first transaction relating to that land (so that the amount of capital that Q must receive to satisfy condition E is unchanged by the substitution of land); and
the ten year time limit for condition G continues to apply by reference to the first transaction relating to the original land.
89.Sub-paragraph (5) provides that, if the replacement land is in the UK, the charge on the original land will be discharged when, Q provides HMRC with the prescribed evidence that the original land has been returned to P and a charge has been registered in relation to the replacement land,.
90.Sub-paragraph (6) provides that, if the replacement land is not in the UK, the charge on the original land will be discharged when Q provides HMRC with the prescribed evidence that all of conditions A to C are met for the replacement land and that the original land had been returned to the original owner.
91.Sub-paragraph (7) provides for the rules in relation to asset substitution to apply where there is more than one substitution of land during the lifetime of a bond.
92.Paragraph 19 provides that, where a charge on the land is discharged because the land has ceased to be a bond asset, either at the expiration of the bond with all of conditions A to G having been met, or because of a substitution of land to which paragraph 18 applies, HMRC must take the necessary action to remove the charge from the land register. This must be done within 30 days of Q providing the prescribed evidence that enables the charge to be removed.
93.Paragraph 20 provides rules for the situation where a bond-holder, or a group of connected bond-holders, acquires control of the bond assets. The circumstances in which the paragraph applies are the same as for paragraphs 3 and 4 of the Schedule.
94.Sub-paragraph (2) explains what is meant by a single bond-holder, or a group of connected bond-holders, acquiring control of the underlying asset. This happens if:
the rights of bond-holders under an alternative finance investment bond include rights of control and management over the bond; and
a bond-holder, or a group of connected bond-holders, acquires sufficient rights to enable them to exercise management and control over the bond assets, regardless of any other bond–holders.
95.Sub-paragraph (3) provides that:
if a bond-holder, or the group, acquires control before the termination of 30 days from the first transaction, no relief for SDLT or TCGA purposes is available in relation to the arrangements; and
if a bond-holder, or the group, acquires control after that period of 30 days, and conditions A to C have been met within that 30 day period, paragraphs 8 and 12 apply to withdraw the reliefs under paragraph 6 (for SDLT purposes) and 11 (for TCGA purposes) respectively.
96.Paragraph 21(2) provides that where, at the time the rights under the bond were acquired, a bond-holder, or all of a group of connected bond-holders, did not know or had no reason to suspect that the bonds enabled the exercise of the rights of management and control of the bond assets and, having subsequently become aware of the rights attached to the bonds, the bond-holder(s) transferred sufficient bonds, as soon as reasonably possible so that they could no longer exercise such control.
97.Paragraph 21(3) provides for the second exclusion for persons acting as underwriters of the bond issuance providing they do not exercise the right of control and management of the bond asset.
98.Paragraph 22 is an anti-avoidance provision. It provides that the reliefs under paragraphs 6 to 12 (extended where appropriate by paragraph 18 in relation to substitutions of land) are not available unless the arrangements:
are entered into for genuine commercial reasons; and
are not part of arrangements whose main purpose, or one of whose main purposes, is the avoidance of liability to any of a number of taxes (which are listed in paragraph 22(2)).
99.Paragraph 23 provides rules in relation to regulations that can be made under provisions of this Schedule.
Consequential changes
100.Paragraph 25 inserts new section 73C into FA 2003. This provides a cross-reference to this Schedule.
101.Paragraph 26 inserts new subsection (5A) into section 86 of FA 2003 (payment of tax) ensuring that tax is payable where the land ceases to qualify for relief in respect of alternative finance investment bonds.
102.Paragraph 27(2) amends section 48B of FA 2005 (alternative finance investment bonds) to replace references to ‘any tax other than the Corporation Tax Acts’ in subsection (2) and (3) with references to income tax or CGT.
103.Paragraph 27(3) inserts new subsection (9) into section 48B of FA 2003 which refers to this Schedule.
104.Paragraph 28 repeals paragraph 651(a) of Schedule 1 to the Corporation Tax Act 2009.
105.Paragraph 29 provides the commencement provision for the Schedule. Sub-paragraph (1) provides that the amendments to section 48B of FA 2005 made by paragraphs 2 to 4 and 27, and the amendment to FA 2003 made by paragraphs 25, have effect from the date of Royal Assent.
106.Sub-paragraph (2) of paragraph 29 provides that the rest of the Schedule has effect where the first transaction (as explained in paragraph 5(2), takes place on or after the date of Royal Assent.
Background Note
107.The Government has already introduced legislation enabling the provision of alternative methods for individuals or business to finance a property purchase, deposit money in a bank and borrow money from a financial institution. The focus has now moved to the issue of alternative finance investment bonds based on real property.
108.Interests in land or property as the underlying asset may often back bonds. In a normal securitisation, the investor does not have a direct ownership in the underlying asset but merely an interest-bearing certificate. With alternative finance investment bonds, however, the investors own part of the underlying asset. This necessary change in ownership of the underlying asset may involve SDLT, tax on capital gains and capital allowances issues.
109.To provide similar tax outcomes for alternative finance products to their equivalent conventional finance products, no SDLT or tax on capital gains should be charged when the land is sold to the issuer of the alternative finance bonds and no SDLT or tax on capital gains charged on the sale back of the property to the originator at the end of the bond term. In addition the position of alternative finance bond-holders will be clarified to ensure that SDLT does not arise on the acquisition or transfer of an alternative finance bond certificate. The originator should also be able to claim any CAs on the asset during the term of the bond.
110.These new provisions address certain tax barriers to ensure that the cost of issuing an asset based alternative finance investment bond is equivalent to conventional equivalent financial product.
