SDLT - avoid nasty surprises
Stamp duty was introduced in 1694 and is the oldest tax administered by HMRC.
On 1 December 2003 a reform of stamp duty took place, which introduced Stamp Duty Land Tax (SDLT). At the time, this new tax applied to all land transactions. SDLT is a tax paid by the buyer when acquiring land in England and Northern Ireland. In Scotland, Land and Buildings Transaction Tax (LBTT) applies instead of SDLT, with Land Transaction Tax (LTT) applying in Wales.
Stamp duty remains, and is the tax paid by the buyer when they purchase UK shares and marketable securities. It can still also apply to land transactions entered into before the 2003 change.
We examine the core elements of SDLT and outline areas that could potentially cause issues for land-based and rural businesses.
SDLT is due on the acquisition of ‘chargeable interests’, a term which includes (among other matters):
The transfer of freehold land
The grant of a lease
Assignment of leases; and
Extending or terminating a lease
Licences are ‘exempt interests’, and hence the grant of a licence does not give rise to an SDLT charge.
Chargeable consideration is any money or money’s worth given for the subject-matter of the transaction, directly or indirectly, by the purchaser or a person connected with them. It’s important to note that the chargeable consideration includes any VAT in respect of the transaction and without any discount for postponement of the right to receive consideration.
Some less commonly known issues can arise in certain situations. Particular problem areas include:
- The assumption of debt is a chargeable consideration, this includes gifting a property where there is a mortgage.
- Where there is a series of transactions, the SDLT legislation contains rules which allow HMRC to ignore the individual steps, and instead impose a charge on a notional direct transfer of the property. This rule can have surprising and counter-intuitive consequences and can lead to material increases in the tax liability.
- The 3% residential property surcharge always applies for companies, and may apply for trusts, depending on the specific circumstances.
- SDLT is due on both the lease premium and the net present value (NPV) of the rent payable when a lease is granted.
- An extension of a lease is the acquisition of a new interest and SDLT may be due.
- A termination of a lease is an acquisition by a landlord and SDLT may be due by the landlord.
- Transfers to and from partnerships by and to ‘unconnected’ parties are likely to incur an SDLT charge. A trust can be connected via its settlor, but that connection is broken where the settlor is deceased.
- Transfers to ‘connected’ companies are usually deemed to be at market value, regardless of any consideration actually paid. The connected persons net is wide and includes:
- Spouses/civil partners, relatives and their spouses (ancestor or lineal descendants),
- Trustees of a settlement,
- A partner in a partnership, who is legally connected to any other partner in the partnership and their spouse/civil partners and relatives, and
- Other companies where they are under control of the company, or where persons connected with them have control.
- There are many reliefs to consider, including multiple dwellings relief, first time buyers’ relief and sale and lease back relief. They all have specific requirements to ensure the relief is due and claimed appropriately.
- Anti-avoidance provisions are in place to impose a charge to SDLT where, during the three-year period after a transfer of land to a partnership, the transferor or a partner connected to them makes a capital withdrawal, reduces their partnership interest, or ceases to be a partner. This can include the withdrawal from a capital account or repaying a partner’s loan.
The rules for SDLT are complex and there are a wide number of scenarios where an unintended charge may arise. It’s always important to properly plan and seek professional advice.