Stamp Duty Land Tax (SDLT) is generally payable on the purchase or transfer of interests in land and buildings in the UK where the amount paid is above a certain threshold. In addition, most UK land and property transactions must be notified to HM Revenue & Customs (HMRC) on a Stamp Duty Land Tax return, even if no tax is due.
Acquisition of chargeable interest
A land transaction requires the acquisition of a ‘chargeable interest’, which is defined quite widely to include:
- an estate interest, right or power in or over land in the UK, or
- the benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power
The most common examples are the sale of freehold land and the assignment or grant of a lease, although other transactions such as payments to release a restrictive covenant are also potentially chargeable. There are specific exemptions from this definition for security interests and licences to occupy http://abytx.co/1g87SdH.
In some cases, it matters whether a chargeable interest is a ‘major interest in land’ http://abytx.co/1g88ekp , which is broadly either a freehold or leasehold interest. The distinction can have relevance for SDLT purposes, for example, in respect of:
- the sale and leaseback exemption
- relief for carrying out works on land owned or to be acquired by the purchaser
- alternative finance reliefs
- operation of the exchange rules
- notification rules
A person who acquires a chargeable interest is referred to in the legislation as the ‘purchaser’ and a person who disposes of the interest is the ‘vendor’. These expressions apply even if there is no consideration for the transaction. The purchaser is liable to submit a land transaction return to HMRC http://abytx.co/1bmec9K and pay the tax http://abytx.co/1cam2HM.
Contracts to acquire a chargeable interest
Normally, the purchase of land is a two stage process. First, the parties enter into a contract, often referred to as ‘exchange of contracts’. Usually, the purchase is then concluded by completion, when legal title to the land passes to the purchaser.
A person is not regarded as entering into a land transaction simply by entering into a contract. If the transaction proceeds to completion, the contract and completion are treated as a single land transaction. In this case, the effective date of the transaction is treated as the date of completion. The effective date is important for the administration of SDLT as it is the date which determines when the SDLT return must be filed and when the SDLT must be paidhttp://abytx.co/1hRMcjo.
If the contract is ‘substantially performed’ without having been completed (for example if the purchaser is allowed to occupy the property or 90% or more of the purchase consideration is paid), the contract is then treated as being the land transaction. In this case, the effective date of the transaction is treated as the date of substantial performance. Subsequent completion of the contract may result in a further requirement to file a return and further SDLT may be due in some circumstances http://abytx.co/1fhDXuM.
Similar principles apply where there is an agreement for lease. Entering into an agreement for lease does not trigger a liability to pay SDLT until the lease is actually granted, unless the agreement for lease is substantially performed. Where an agreement for lease is substantially performed this may lead to an obligation to file an SDLT return.
SDLT rates and thresholds
The tax rate and payment threshold can vary according to whether the property is in residential or non-residential use. Special rules apply to the grant of a lease.
The chargeable consideration for a transaction is usually the consideration given for the land transaction in money or money’s worth, directly or indirectly by the purchaser or a person connected with him. Specific rules apply for certain types of chargeable consideration such as the assumption of an existing debt (e.g. a mortgage) by the purchaser, carrying out of works and provision of services. The chargeable consideration is taken to include any VAT chargeable in respect of the transaction, except if the vendor has opted to charge VAT, but has not elected to do so by the effective date of the transaction.
In certain circumstances where the chargeable consideration is defined by reference to the market value of the property, the VAT may be excluded (for example transfer to a partnership by a partner or person connected with a partner) http://abytx.co/1fbtYsI.
If the receipt of the consideration is postponed (for example, payment by instalments), no discount is given for that postponement.
Separate transactions can become ‘linked’ for SDLT purposes where they form ‘part of a single scheme, arrangement or series of transactions between the same vendor and purchaser or, in either case, persons connected with them’. The application of this rule can be wide and results in the rate applied to each transaction by reference to the aggregate consideration provided for all the linked transactions. For example, where these rules apply, two transfers of non-residential land for consideration of £275,000 each would be subject to SDLT at 4% rather than 3% on the basis that the rate is applied to the aggregate consideration of £550,000, rather than £275,000 for each separate transaction http://abytx.co/1hqYiz4.
Exemptions and reliefs
There are various exemptions and reliefs available (usually subject to conditions) to reduce or exempt a charge to SDLT. A selection of the most commonly encountered reliefs is provided below:
- group relief – for transfer of property between corporate entities within the same group
- reconstruction relief – for corporate de-mergers
- acquisition relief – available on the acquisition of property that is part of a trading undertaking – which has the effect of restricting the rate of SDLT to 0.5%
- charities relief for the acquisition of property by charities for charitable purposes
- sub-sale relief – available to an intermediary purchaser where the acquisition of property takes place at the same time as and in connection with the onward sale to the end purchaser. It should be noted that this relief has been in amended in Finance Act 2013.
- multiple dwellings relief – which broadly operates by restricting the rate of SDLT on the acquisition of a portfolio of residential property by reference to the average price per dwelling
- certain acquisitions of residential property by property traders such as chain breaking and part exchange
- relief to remove the provision of works as being chargeable consideration for SDLT purposes carried out on land acquired or to be acquired by the purchaser
- relief for leaseback element on a sale and leaseback transaction
- incorporation of a limited liability partnership
- limited relief for certain public/private transactions
Sub-sale relief has been rewritten by Finance Act 2013 with the aim of addressing SDLT avoidance arrangements, for example, where the sub-sale qualified for relief or had no or nominal consideration. The new rules are more complex and introduce a number of significant changes of which taxpayers should be aware:
- the intermediate purchaser now has an obligation to file a return and claim relief
- a targeted anti-avoidance rule has been included which denies relief where there are tax avoidance arrangements
- a minimum consideration rule operates in circumstances where the parties are connected, or not acting at arm’s length
See HMRC’s guidance note http://abytx.co/1dAMshw on the new rules which provides further details and examples.
Where a land transaction is entered into by a purchaser in consideration of entering into another land transaction as vendor, there are exchange provisions which can apply to treat the chargeable consideration as the higher of the actual consideration provided or the market value of the interest acquired.
This can lead to difficulties in interpretation, for example, if a freehold of a property development is transferred to a management company subject to a 150 year lease being granted back – in this scenario there is potentially substantial SDLT payable by the management company in respect of the value of the 150 year lease which is granted back in consideration for the freehold reversion. HMRC has issued guidance aimed at addressing this and similar issues but if certainty is required, a ruling should be requested. Please refer to the guidance issued on HMRC’s website http://abytx.co/1g8cAbs.
Contingent, uncertain or unascertained consideration
Contingent consideration is consideration which is payable (or not payable as the case may be) if some uncertain future event occurs (or doesn’t occur). A common example is that part of the consideration for the purchase of land is dependent on planning permission being granted. The basic rule for SDLT is that a contingency is assumed to act such that the consideration will be payable http://abytx.co/KTJNsZ.
If there is uncertain consideration, SDLT is payable on the basis of a reasonable estimate of the value of the uncertain consideration. HMRC do not provide examples of what may constitute a reasonable estimate in the SDLT Manuals. In practice, what is reasonable for this purpose will vary depending upon the facts of each case.
Once the contingency occurs, or doesn’t occur as the case may be, or the consideration ceases to become uncertain, further returns and payment of SDLT may become due, or a refund claimed if SDLT has been overpaid.
An application can be made to HMRC to defer payment of SDLT in cases where the amount payable is dependent on contingent or uncertain chargeable consideration which falls to be paid or provided on one or more future dates of which at least one falls, or may fall, more than six months following the effective date of the transaction. See SDLTM50910 http://abytx.co/1ejcFlC for further information on the procedure for deferring payment of SDLT in the case of contingent or uncertain consideration. Note that it is not possible to defer payment of SDLT in respect of unascertainable rent on the grant of a lease.
There are complex rules for calculating the chargeable consideration in respect of the following partnership transactions. For these purposes, a partnership includes a limited partnership (LP) a limited liability partnership (LLP) or a similar entity formed under the law of a territory outside the UK.
- transfer of an interest in land to a partnership from a partner or connected person (for example, in return for an interest in the partnership)
- transfer of an interest in a property investment partnership and
- transfer of an interest in land from a partnership to a partner or connected person
Some element of relief may be available on transfer to and from a partnership dependent on the precise circumstances.
There are anti-avoidance rules that can apply where relief is obtained on the transfer of property by a partner or a person connected with a partner to a partnership and at the time of the transfer there were arrangements in place for a subsequent transfer of interests in the partnership. The effect of this rule is to charge SDLT on the subsequent transfer by reference to the market value of the property and the proportion of interest transferred.
In addition, there is an anti-avoidance rule that applies where relief is obtained on the transfer of property by a partner or a person connected with a partner to a partnership and within three years there is a withdrawal of capital or loans from the partnership by the original transferor, partner or connected person as applicable. Where this rule applies, SDLT is charged by reference to the monies withdrawn up to the market value of the property at the time it was originally transferred to the partnership.
Transfer to connected company
A special rule applies where the purchaser is a company and either:
- the vendor is connected with the company, or
- some or all of the consideration for the transaction is the issue or transfer of shares in a company with which the vendor is connected
An example would be where land is transferred from a sole trader to a company on incorporation.
In such cases, the chargeable consideration is the higher of market value of the land at the date of the transaction or the actual consideration provided (including VAT) http://abytx.co/1caqJ4a.
This rule applies even if the land is gifted to the company, as the exemption for when there is no chargeable consideration in FA 2003, Sch 3 para 1 is disapplied in this case.
There are a few exceptions to this rule, in particular where the transfer is made by way of a distribution of assets (whether or not in connection with its winding up) and no group relief claim has been made by the vendor in respect of the land concerned within the three years preceding the transfer http://abytx.co/1e0VHfp.
Where land is transferred by a partnership to a company on incorporation, the special partnership rules may apply in priority to the connected company rules such that an element of relief from SDLT may be available. It is recommended that detailed advice is sought in such circumstances http://abytx.co/1eXHeyR.
There are specific rules for trusts contained in FA 2003, Sch 16. The general rule is that for bare trusts, such as nominee arrangements, the beneficiary is treated as the purchaser for the purposes of the SDLT rules. However, there is an anti-avoidance measure in respect of the grant of a lease, whereby the bare trustee is treated as the purchaser (grantee) or vendor (grantor) as applicable, which can produce unexpected results.
As noted elsewhere, there are a number of targeted anti-avoidance provisions in the SDLT legislation.
More generally, the impact of the main SDLT anti-avoidance provision (FA 2003, s75A), anti-avoidance case law and the General Anti-Abuse Rule (GAAR) must be considered in more complex transactions and appropriate professional advice should be obtained.
FA 2003, s75A is prescriptive and rather unclear in its application. It applies where three conditions are met:
- there is a disposal of a chargeable interest in land by one person (V) to another (P)
- a number of transactions (which can include non-land transactions) are involved in connection with the disposal and acquisition
- the sum of the SDLT payable in respect of these transactions is less than the amount which would be payable on a notional transaction effecting the acquisition of V’s chargeable interest by P on its disposal by V
In such circumstances, SDLT is chargeable on the greater of the amount given by any one person under the transactions or received by V by way of consideration for those transactions.
The legislation does not explicitly require an avoidance motive to be present. The rule is therefore of potentially very wide application. However, HMRC’s published guidance (now incorporated in its SDLT manual at SDLTM09175 http://abytx.co/1fhI8H3) indicates that HMRC will seek to apply the legislation purposively where there is avoidance of tax.
The scope and operation of s75A was considered in the case of Project Blue Limited v HMRC  UKFTT 378 (TC) http://abytx.co/1eje77y, where a sub-sale was combined with an alternative finance arrangement with the proposed result that no SDLT arose on a third party acquisition of valuable property. The First-tier Tribunal examined the application of s75A and concluded that it should apply in the circumstances.
A further important SDLT avoidance case is DV3 RS Limited Partnership v HMRC  EWCA Civ 907 http://abytx.co/1l5a9II, which was decided in favour of HMRC at the Court of Appeal. This case involved a sub-sale into a partnership, where the taxpayer claimed that the combination of the sub-sale and partnership rules resulted in no SDLT being payable. The case pre-dated the introduction of s75A; however, the Court agreed with HMRC that the rules did not operate to allow the partnership relief to be available and an SDLT liability arose.
The General Anti-Abuse Rule (GAAR) has also been introduced from 17 July 2013, and its scope includes SDLT.
The disclosure of tax avoidance scheme (DOTAS) rules in FA 2004 Part 7 require a disclosure to be made to HMRC concerning certain planning arrangements involving SDLT. The current arrangements that require disclosure are set out in SI 2005/1868.
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