Land (transaction tax) ahoy!

This article was first published in Estates Gazette on September 28, 2017

As Wales embraces a new land transaction tax in place of SDLT, Sian Skerratt-Williams uses her cross-border expertise to explain how it will work and what it may mean for Welsh real estate.

Divergence between the law in England and that in Wales is increasing (see The growing divide between England and Wales, EG, 31 October 2015) but this seems to receive surprisingly little attention on the English side of the border. That may be about to change, certainly insofar as real estate is concerned, once stamp duty land tax (SDLT) is scrapped in the principality. 

The Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017 (the Act) received Royal Assent in May 2017. It introduces a new land transaction tax (LTT) that will replace SDLT in Wales as from April 2018.

The Wales Act 2014 disapplied SDLT in Wales and devolved tothe National Assembly for Wales the power to replace it with a tax on land transactions. The legal framework for a Welsh tax regime was created by the Tax Collection and Management (Wales) Act 2016. This included the replacement of HMRC with a new Welsh Revenue Authority (WRA) to collect and manage LTT – and other devolved taxes - in Wales. 

It is perhaps fortuitous from a Welsh perspective that the introduction of LTT is against the background of a new land and buildings transaction tax (LBTT) in Scotland, replacing SDLT since April 2015. This is no doubt proving to be a useful case study for LTT from which lessons can be learned, particularly in terms of setting rates and bands.

Currently the Welsh Government receives a block grant from the UK Government. The devolution of SDLT will mean a reduction in that funding to take account of the new funding stream that will be generated by LTT revenues.

A natural question might therefore be: why devolve? This would be particularly justified given the no doubt costly additional level of administration required to collect and manage LTT.

In a discussion paper entitled Land Transaction Tax: Setting rates and bands, published by the Welsh Government in September 2016, it is explained that: “The devolution of tax powers provides a range of opportunities for the Welsh Government to develop a Welsh approach to taxation to meet the needs and preferences of citizens in Wales”. This, then, is seen as an opportunity to deliver a tax that  focuses on the specific needs and priorities of the Welsh economy and property market. Statistics suggest the Welsh property market is markedly different to that in England. For example, according to Land Registry data, the average residential property price in Wales (as of July 2017) was £150,846, as opposed to £243,220 in England. Wales also has a greater share of transactions at the lower end of the property price range compared to England, relatively few high-priced residential transactions and also relatively few non-residential transactions. 

It is acknowledged that significant differences between SDLT and LTT would have the potential to distort the property market, particularly in the non-residential sector where taxpayers may have more flexibility as to which side of the English and Welsh border they are based. LTT therefore aims for a high degree of consistency between the two regimes, with no change just for the sake of it. As a result, LTT has a similar basic structure to SDLT and preserves key features such as a marginal (as opposed to slab) tax rate structure, so the relevant tax rate only applies to the proportion of the property value that falls within a particular band, and higher rates on the purchase of additional residential properties. Reliefs will also be similar to those applying to SDLT.

However, some changes have nevertheless been made not only to try to mould LTT to Welsh requirements, but also to make it simpler, fairer, clearer and more efficient than SDLT. Greater simplicity and clarity are also intended to help achieve another aim: a reduction in tax avoidance.

Simplification starts with the form of the legislation itself. The Act is in 8 parts, with Part 1 providing a helpful overview of its content, which is then clearly divided by topic in a seemingly user-friendly way.

• Part 2 covers the key principles and concepts underpinning LTT. It explains that it is a tax to be charged on land transactions (however they are documented), a “land transaction” being defined as an acquisition of a chargeable interest in land in Wales, regardless of where the parties are resident. Special provision is made for land partly in Wales and partly in England. Particular transactions such as contracts and transfers are dealt with here.

• Part 3 explains how the tax will be calculated and the available reliefs.

• Part 4 sets out how LTT applies to leases.

• Part 5 how it applies to certain types of buyer such as companies, partnerships, trusts, joint buyers.

• Part 6 covers the process for making an LTT return and payment of the tax.

• Part 7 sets out specific measures to tackle devolved tax avoidance.

Much of the detail is contained in the 23 schedules, the contents of which are again helpfully summarised in Schedule 1.

Legislative format aside, differences of substance include that:

• The rent element on the grant of new residential leases will not be subject to LTT as it has been shown that, in Wales, SDLT revenue from this element is very low. However, LTT will apply to rent on the grant of new non-residential leases.

• No increased rate will apply to acquisitions of higher threshold interests by non-natural persons as this is not regarded as necessary for LTT purposes.

• The rules relating to leases are simplified to improve the way they operate.

• There is a new overarching general anti-avoidance rule (GAAR).  

• There is also a broad targeted anti-avoidance rule (TAAR) applicable to all reliefs. This prohibits a relief from being claimed where the transaction is, or is part of, a “tax avoidance arrangement”.

• LTT contains some additional rules for higher rates residential property transactions, such as the acquisition of an additional residential property by an individual, including clarification of the rules relating to major interests.

LTT rates and bands – and the number of bands - are expected to be announced next month.

Inevitably, the practical impact of LTT on the property market will depend very much on the bands and rates that are set. Any divergence between SDLT and LTT rates may influence the timing of transactions in the run-up to April 2018, distorting the market in the short term by either delaying transactions in Wales or bringing them forward, depending on which rates are more favourable from the perspective of the taxpayer. Significant differences may well have a longer-term economic impact by influencing where property investment is made, particularly in the case of large commercial transactions.

The existence of different property tax regimes in England and Wales also has the potential to make life a little more complicated - and expensive - for businesses involved in cross-border property transactions, such as the purchase of a portfolio of properties, some located in Wales and others in England. Even if tax rates and bands are similar, advisers will need to be familiar with two tax regimes and two tax returns will be required, although that administrative burden will be reduced if there is an efficient electronic filing system in place for LTT returns, as there is for SDLT returns.  

An added layer of complexity may be introduced from a legal perspective by the fact that the legislation governing LTT will exist in English and in Welsh, both having equal standing.

However, provided LTT achieves its goals – and much will depend on the rates that are set – these administrative and legal complications should prove to be of minor consequence in the overall scheme of things. Indeed, a simpler and more user-friendly property tax regime may prove to be an inducement to investment in Wales.  

LTT is not the only devolved tax on the horizon.  The Landfill Disposals Tax (Wales) Act 2017 became law on 7 September and replaces landfill tax in Wales from April 2018. The Wales Acts 2014 and 2017 also provide for the partial devolution of income tax, allowing the National Assembly to set the income tax rates to be paid by Welsh taxpayers.  This is expected to be implemented in April 2019. So LTT is just the beginning...