An equity slice is an odd sort of asset as it is very difficult to dispose of the interest other than to the holder of an adjacent interest or in conjunction with a sale of other interests in the building.
As with any property transaction it is important to determine the owner’s purpose in taking the equity slice. This is normally a trading purpose. The interest is acquired because a lender or the vendor of a property wishes to obtain a share of the development value of the property. He normally expects, or even is contractually entitled to, an exit route shortly after completion of the development.
As an equity slice is normally created as a “sweetener” for something else – usually a loan – it generally has no base cost. An equity participation by a vendor will usually have a low base cost, either because its acquisition is a retention of part of the original interest in the property or, more likely, because the Marren v Ingles (54 TC 76) principle applied on its acquisition.
An equity slice could alternatively be caught by ss 752 – 772 ITA 2007 (formerly s 776, ICTA 1988) as having been acquired either with the sole or main object of realising a gain from disposing of it or in circumstances where the property is developed with the sole or main object of realising a gain from disposing of the property when developed. The development test is an odd one insofar as it does not appear to look at the nature of the holder of any individual interest in the land but rather at the reason for the land having been developed. This probably looks at the motive of the owner of either the freehold or the long leasehold of the property, not that of the owner of the slice.
The VAT treatment depends on how the transaction is structured. With the exception of residential and relevant charitable property, disposals of new buildings and cases where the owner of an interest has waived exemption, most property transactions are exempt from VAT. However the exemption applies to the grant of any interest in, or right over, land, or any licence to occupy land. Whilst this is broad enough to cover an equitable interest it clearly requires an interest in the land itself. In many cases an equity slice will not constitute an interest in land. It will be a personal right to be paid a sum equal to a percentage of the value of the land. Such a sum is not VAT exempt. It is VATable at 17½%. This applies even if the slice is in a residential development.
Even if the slice gives the holder an interest in the property that is not necessarily the end of the matter. In Abbey National plc v HMRC (2006 STC 1961), which dealt with virtual assignments, the Court of Appeal held that a right of occupation is an essential and fundamental element of a transaction of leasing or letting, so if there is no such right the rent must be consideration for something else (in that case, agency and management services), so the VAT treatment will depend on for what it is consideration.