Sale and Leaseback

SDLTM(tbc) - Sale and Leaseback

The provisions of section 57A Finance Act 2003 apply where A transfers or grants a major interest in land to B and, out of that interest, B grants a lease to A. As this transaction is an exchange, both parts of the transaction are, under the provisions of section 47 Finance Act 2003, chargeable on the market value of the interests transferred. However, where all the conditions of S57A (3) are met, the leaseback element will be exempt. These conditions are:

the interest leased back must be an interest out of the original interest
the sale leg must be in wholly or partly in consideration of the leaseback, where partly the only other consideration is the payment of money or release from/assumption of a debt
there is no transfer of rights under section 45 or 45A FA03 involved in the transaction and
where A and B are both bodies corporate at the effective date they are not members of the same group for the purposes of group relief (paragraph 1 Schedule 7 Finance Act 2003).

SDLTM(tbc) - Sale and Leaseback - Example 1

Individual A owns freehold property which he wishes to convert into two commercial units. To enable him to raise finance, he is required to create leasehold interests in the property. Company (B) is set up by A. A transfers the freehold to the company who in turn grants two leases back to A at no premium and a peppercorn rent.

Stamp Duty Land Tax implications:

The transaction is an exchange so we need to establish the market values of both legs. (In these circumstances, the provisions of S53 would also deem a market value consideration to the sale leg irrespective of the exchange element.)
Are the conditions of section 57A(2) & (3) met?

If the conditions are met, the leaseback is exempt and the transfer by A to B will be charged on the market value of the interest transferred under section 47. No account will be taken of any consideration actually passing in these circumstances, but the fact that the interest is encumbered by the leases(s) back is when calculating the market value.

If the conditions are not met the transfer by A to B will be charged on the market value of the interest transferred (section 47 or 53) and the leaseback will be charged on either the market value as an exchange or on the terms of the lease depending on which qualifying condition was not met.

SDLTM(tbc) - Sale and Leaseback - Example 2

Company A owns a leasehold interest in a commercial property, to raise finance it decides to assign its lease to an unconnected company B in consideration of £1m and a leaseback at market rent of the ground floor only.

Section 57A applies as the transfer by A is in consideration of the leaseback by B of part of the property transferred so is an interest granted out of the interest acquired. The only other consideration for the transaction is the payment of money, there is no section 45 or 45A transaction and the companies are not connected for group relief purposes, so relief will be available on the leaseback. The assignment is chargeable on the market value in accordance with section 47; no account will be taken of any consideration actually passing in these circumstances.

SDLTM(tbc) - Sale and Leaseback - Example 3

Company A owns a leasehold interest in a commercial property, to raise finance it decides to assign its lease to company B; both A & B are 100 per cent subsidiaries of C, in consideration of £1m and a leaseback at market rent of the ground floor only.

Section 57A does not apply as the companies are in the same group at the time of the transaction, so both the assignment and the leaseback are chargeable on their market value. Group relief may be available for both elements of the transaction if the conditions of paragraphs 1 & 2 Schedule 7 Finance Act 2003 are met, but the withdrawal provisions of paragraph 3 must also be considered.