Annex 1: Minor changes in the law made by the Act: Change 72: Receipts in respect of sales with right to reconveyance and sale and leaseback transactions: sections 284 and 285
This change introduces a requirement that, for an amount to be treated as a receipt in respect of a sale with a right to a reconveyance or a sale and lease back transaction, the period between the sale and the earliest date of reconveyance or leaseback must be 50 years or less.
Section 36(1) of ICTA provides:
“Where the terms subject to which an estate or interest in land is sold provide that it shall be, or may be required to be, reconveyed at a future date to the vendor or a person connected with him, the following amount shall be deemed to have been received as income by the vendor and to have been received by him in consequence of his having entered into a transaction falling to be treated as mentioned in paragraph 1(2) of Schedule A…”
Section 36(1) of ICTA further provides that the amount that the vendor is treated as having received is the amount by which the price at which the estate or interest is sold exceeds the price at which it is to be reconveyed. But if the earliest date at which it would fall to be reconveyed is two years or more after the sale, the amount of the excess is reduced by 1/50th for each complete year (other than the first) in the period between the sale and that date. This means that if the period beginning with the sale and ending with the earliest date on which the estate or interest fall to be reconveyed is 51 years or more, the amount that the vendor is treated as having received is zero. But the vendor will only discover this after carrying out the calculation required by section 36(1) of ICTA.
It is not appropriate to require the vendor to take a zero receipt into account in calculating the profits of a property business. Nor does there appear to be any reason why the period for sale and reconveyance should be 51 years, while sections 34(1) and 35 of ICTA require that the duration of the lease must not exceed 50 years. So in rewriting section 36 of ICTA, section 284(1)(b) requires that in order for section 284 to apply the period between the sale and the earliest date on which the estate or interest in land would fall to be reconveyed must be 50 years or less. This makes it unnecessary for the vendor to calculate the amount and find that it was zero.
A similar point arises in relation to section 285. Section 36(3) of ICTA provides that, where the terms of the sale provide for the grant of a lease directly or indirectly out of the estate or interest to the vendor or a person connected with him, section 36 of ICTA applies as if the grant of the lease were a reconveyance of the estate or interest. Again, the effect of section 36(1) and (3) of ICTA is that the amount treated as received by the vendor will be zero if the period beginning with the sale and ending with the earliest date on which under the terms of the sale the lease would fall to be granted exceeds 51 years.
As in the case of sales with a right to a reconveyance, there does not appear to be any reason why this period should be 51 years, rather than 50 years. So section 285(1)(b) requires that in order for section 285 to apply the period between the sale and the earliest date at which the lease would fall to be granted must be 50 years or less.
This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.