SDLT has now largely replaced stamp duty and is a self-assessed tax on the legal effect of UK land and property transactions. As SDLT is a tax on transactions not documents, it has overcome most avoidance schemes.
Where does it apply?
SDLT is charged on the creation, surrender, release or variation of any estate, interest, right or power in or over UK land, or of the benefit of an obligation or condition affecting the value of UK land. In this respect it is wider ranging than stamp duty. Examples of transactions which are outside the scope of stamp duty, but which are subject to SDLT if they are entered into for valuable consideration, include the removal of a break option from a lease or some other variation of a lease, the lifting of a restriction covenant affecting land and the release of an option over land.
Certain transactions are exempt from SDLT, most notably licences and security transactions. In addition, no SDLT is payable on reverse premiums (i.e. payments by landlord to tenant at the grant of a lease, or by assignor to assignee on the assignment of a lease, or by tenant to landlord upon the surrender of a lease).
Why has it been introduced?
SDLT has been introduced to overcome the many tax avoidance schemes, an example of which is the “split title scheme”. Here, as SDLT is a tax on transactions not documents, it is irrelevant whether or not a sale is completed by a transfer of legal title. Resting on contract where the price is paid and beneficial ownership transfers to the purchaser but with the vendor retaining legal title as trustee for the purchaser, has been a recognised means of mitigating stamp duty – as no stampable document is created no stamp duty charge is triggered. However, under SDLT the payment of a substantial amount of the consideration and/or the transfer of beneficial ownership triggers a charge to tax – the transaction has occurred even though no transfer has been completed.
SDLT Impact on Leases
The biggest area of change in the way the tax differs from stamp duty relates to leases, where a tax of 1% will be charged of the net present value (NPV) of the lease, above a threshold of £150,000. The NPV is the aggregate of all rent payments throughout the life of the lease (ignoring the effect of open market rent reviews after year two) discounted at 3.5% p.a. VAT has to be included in the figure if at the time when the lease is granted the landlord has elected to charge VAT on its property interest.
Typical comparisons between stamp duty and proposed SDLT on leases on exempt property.
Period
of Lease
Annual
Rent
Stamp
Duty
SDLT
5 yrs
£25,000
£295
Nil
5 yrs
£50,000
£590
£757
15 yrs
£250,000
£5,875
£27,293
15 yrs
£1,500,000
£35,250
£171,261
25 yrs
£1,500,000
£35,250
£245,722
Administration and Compliance
SDLT operates according to a “pay now, process later” approach. Within 30 days after the effective date of a transaction, the purchaser or tenant is obliged to submit to the Inland Revenue a land transaction return with full details of the transaction, along with a cheque for the taxpayer’s estimate of the SDLT payable. Interest is payable on late payment of SDLT.
Exemptions and Reliefs
SDLT admits a range of exemptions and reliefs, some of which are similar to those under stamp duty. The main ones include:
Exemption of commercial property transactions in designated disadvantaged areas regardless of value. For details of the areas:-
Reliefs on transfers between group companies, on group reconstructions and on the acquisition of businesses, all subject to clawback if (generally speaking) control of the acquiring company changes within three years.
Relief for acquisitions by charities (including purchases and leases) provided the property is to be used for charitable purposes and subject to clawback if the property ceases to be used for charitable purposes within three years.
Disclaimer
The information in this note is offered as general guidance and should not be considered as specific advice. If you further information, please ask your Dron & Wright contact.
