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Stamp duty land tax
SDLT was introduced on 1 December 2003 to replace stamp duty. Stamp duty was a charge on documents and was easily avoided by ensuring that there was no 'stampable' document. SDLT does not depend on documents. It is a tax on land transactions and aims to capture any transfer or creation of value in land for consideration. It was designed as part of the anticipated move towards 'e-conveyancing', where contracts, transfers and leases will be made available online without the need for physical documentation, though that project was put on indefinite hold by the Land Registry in 2011.
Strict time limits for reporting land transactions and for paying the tax are reinforced by automatic penalties and interest charges. The Land Registry cannot register a notifiable transaction without confirmation that SDLT has been properly dealt with. The signed land transaction return and tax payment should be available on completion - not be left to be dealt with as a 'post-completion' matter.
A 'Land Transaction' is the acquisition of a 'chargeable interest' in land (whether legal or equitable). 'Chargeable interest' includes any:
in or over land in the United Kingdom. It also captures the benefit of an obligation, restriction or condition affecting the value of any of these.
Exempt interests are excluded. Among these are:
any security interest (eg a mortgage), and
a licence to use or occupy land
Land Transactions are chargeable to SDLT unless they are exempt from charge. There is a list of exemptions in Finance Act 2003, Sch 3. These include transactions with no chargeable consideration (para 1). There are others.
Major interests are an estate in fee simple absolute or a term of years absolute (either legal or equitable).
A chargeable interest can be 'acquired' when it is:
The objective is to capture any transfer or increase in the value of land for which consideration is given, unless the transaction is specifically exempted.
Where a land transaction involves a number of persons acquiring a property through a bare trust (except in the case of the grant of a lease), it is the beneficiaries who are liable to comply with the SDLT obligations.
Where the purchasers are joint tenants or tenants in common, the SDLT obligations are joint. Each is considered to be jointly entitled to 100% of the beneficial interest.
Consideration includes any money or money's worth given for a chargeable interest by the purchaser or a person connected with him. This wide definition can produce unexpected liabilities, eg if a house were transferred by the owner into joint names the new co-owner might be liable to pay SDLT on the amount of any outstanding mortgage. In that case, the 'consideration' would be given by the new co-owner taking on liability for a debt.
The chargeable consideration is for most purposes the sum actually paid. However, special rules apply to exchanges. Where chargeable interests are exchanged, each transaction is to be taxed separately. For transactions involving major interests, the consideration is deemed to be the market value of the chargeable interest acquired by each party to the exchange.
SDLT is designed for 'risk based enforcement'. Details of any notifiable transaction must be given on a land transaction return. Revenue and Customs has power to investigate transactions to ensure that tax has been fully and properly paid and full records of a transaction must be kept for at least six years.
If there is no chargeable consideration there is no obligation to notify the transaction and no tax is payable. No certificates are required to register it at the Land Registry. There are exceptions for connected companies and employee benefits.
Otherwise, the acquisition of a 'major' interest for consideration is notifiable whether or not any SDLT is payable. A lease granted for less than seven years is notifiable where either the premium or the rent would attract SDLT at 1% or higher (before any relief). Acquisitions of other interests are notifiable if the consideration would attract SDLT at 1% or higher (before any relief). Notification is by means of a Land Transaction Return (SDLT1).
For transactions completed on or after 12 March 2008 simplified rules apply where no tax is payable. The SDLT 60 'self certification' form is no longer used. Notification is not required for:
a freehold acquisition where the chargeable consideration (including any linked transaction) is less than £40,000. For example, this includes transfers of freehold land, deeds of gift, the grant of easements or the release of covenants
the grant of a lease for seven years or more where the premium is less than £40,000 and the annual rent is less than £1,000
the assignment or surrender of a lease where the lease was originally granted for a term of seven years or more and the consideration is less than £40,000 and the rent is less than £1,000
the grant, assignment or surrender of a lease for a term of less than seven years where the premium does not exceed the zero-rate threshold - £125,000 for residential properties and £150,000 for commercial or mixed use properties
Revenue and Customs issue a certificate (SDLT5) in all other notifiable cases following submission of a Land Transaction Return.
The 'effective date'
Details of a notifiable transaction must be filed, and any SDLT paid, within 30 days after the 'effective date' of the transaction. This will normally be the date of completion unless the contract is 'substantially performed' before then. Substantial performance occurs if the purchaser or a 'connected' person takes possession or occupation of substantially the whole of the property, or a substantial amount of the consideration is paid. This may include the first payment of rent.
Charge to tax
As with VAT, some transactions are zero rated. These are where the consideration is:
less than £125,000 for residential land (but see below), or
£150,000 for commercial or mixed use land (where any rent reserved is less than £1,000 a year)
No tax is payable in these cases.
A charge of 1% applies above these levels, rising to 3% above £250,000 and 4% above £500,000. For residential property transactions with an effective date on or after 6 April 2011 a charge of 5% applies above £1,000,000.
Finance Act 2012 introduces:
a new SDLT rate of 7% for residential property transactions over £2 million with an effective date on or after 22 March 2012
a new SDLT rate of 15% for residential property transactions over £2 million where the purchase is by a non-natural person. The rate applies to transactions with an effective date on or after 21 March 2012. The higher rate applies where the purchaser is a company (but not one acting as the trustee of a settlement), or the transaction is entered into by a partnership one or more of whose partners is a company or the transaction is entered into for the purposes of a collective investment scheme. If there are two or more purchasers acting jointly condition is met if at least one of them qualifies. The higher rate will not apply to interests acquired by a company in the course of a property development business for the sole purpose of developing and reselling the land, where the company had been carrying on that business for at least two years before the effective date of the transaction
If there are 'linked transactions', the consideration is aggregated to determine the appropriate rate of tax.
Rent payable on the grant of a lease is chargeable to tax on the net present value of the rent in addition to any tax due on the premium. The provisions are contained in Finance Act 2003, Sch 5. Revenue & Customs' website includes a calculator for those not wishing to use the formula in Finance Act 2003, Sch 5, para 3.
Separate (and complex) rules apply to the tax on lease premiums and rents.
SDLT is chargeable on the premium (but not any reverse premium). Rent deposits count towards the premium element if they exceed twice the maximum rent payable in the first five years of the term.
SDLT is chargeable on the 'net present value' of the rent. This involves adding together the actual rent payable for each year of the term (after discounting each by the 'temporal discount rate', currently 3.5% a year). This is not the same as taking the average annual rent for stamp duty calculations. For RPI linked rents, the initial rent is used for the calculation over the whole length of the lease.
VAT is treated as part of the chargeable consideration unless the election to waive the exemption is made after the effective date of the transaction. The calculation is based on the VAT rate that is certain at the effective date. This is 20% since 4 January 2011.
The rent for any period 'after' the end of the fifth year of the term is assumed to be at an annual amount equal to the highest amount of rent payable for any consecutive 12 month period in the first five years. For a ten year term with a review at year five, eg the rent for 'each' of years five to ten will be assumed to be the highest annual rent payable in the first five years. There are anti-avoidance provisions to catch the situation where the rent levels in the first five years are artificially depressed: a rent increase after the first five years will attract further SDLT if it is 'abnormal' (broadly, more than 20% a year). It is treated as if there were the grant of a new lease for the excess.
Where the rent during the first five years is contingent, uncertain or unascertained, eg a turnover rent - a reasonable estimate must be made at the outset. At the end of the fifth year (or if the amount or rent payable during the first five years is ascertained before then), a return must be filed if the transactions have become notifiable, or any additional tax is due.
If a lease is varied during the first five years of the term resulting in an increase in the rent, this is treated as the grant of a new lease for the additional amount.
In calculating the term of a lease, options to renew or break are ignored. A lease which continues beyond its fixed term is treated as a lease for one year longer and, if it continues after that, for two years, and so on. A lease for an indefinite period is treated, initially, as a lease for a fixed term of one year, and then in a similar way to a lease originally for a fixed term. Further returns may be required, eg if the deemed term reaches seven years.
If an agreement for lease is substantially performed before the lease is granted, it is treated as the grant of a lease. If the actual lease is then completed, the transaction is treated as a surrender and re-grant.
From 17 September 2009, the guidance on leases in the HMRC SDLT manual is split into two parts, the first dealing with leases in England and Wales and Northern Ireland and the second with leases in Scotland.
Specific reliefs and exemptions
The SDLT regime includes a number of specific reliefs and exemptions. They include:
acquisition and reconstruction relief
'alternative finance' arrangements, including Sharia compliant funding
reliefs are available to house builders and property traders to facilitate arrangements such as part exchanges
relief on the first sale of new zero-carbon flats (this relief ends on 30 September 2012)
Disadvantaged Areas relief is of limited significance. It now applies only to residential property. Relief for commercial and mixed use property was withdrawn in 2005. It is completely abolished in relation to instruments executed on or after 6 April 2013.
On a sale and leaseback the leaseback element will be exempt from charge if granted out of a major interest in land, the sale is entered into wholly or partly in consideration of it (and is not by way of sub-sale), the only other consideration for the sale is cash or debt and the parties are not members of a group of companies for the purposes of group relief.
Each must be specifically applied for, and the criteria are narrowly construed. Where a relief or specific exemption applied to a previous transaction, anyone acquiring a chargeable interest in that land must check for 'clawback' provisions that could produce an unexpected tax liability.
Relief from SDLT is only available in the case of joint purchasers where all of the joint purchasers are entitled to the relief.
Stamp duty was often described as a 'voluntary tax'. Avoidance was simple and widespread. SDLT is characterised by stringent anti-avoidance rules (including the wide ranging general rule in Finance Act 2003, s 75A). It also requires disclosure of avoidance 'schemes'. Once disclosed, a scheme can be rapidly closed down by secondary legislation. The disclosure rules now extend to transactions involving:
residential property with an aggregate value of at least £1 million, or
mixed residential and non-residential property where either:
the value of the residential property is at least £1 million, or
the value of all the property is at least £5 million
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