Stamp Duty Land tax (SDLT) Technical News (formerly Newsletter) issue 3 - September 2006
Renaming of the SDLT Technical Newsletter
As this publication is now being produced as an interactive online document, it has now been renamed SDLT Technical News.
Budget 2006 and Finance Act 2006 changes
This article summarises the changes made to SDLT legislation by The Stamp Duty Land Tax (Amendment to the Finance Act 2003) Regulations 2006 (2006 No 875) (‘the Treasury Regulations on consideration’) and by Finance Act 2006.
The Treasury Regulations on consideration
The Treasury Regulations took effect on 12 April 2006, but the treatment for which they provide will in practice be applied for earlier transactions (see below).
The main provisions on what is and what is not chargeable consideration are in Schedule 4 Finance Act 2003. The Treasury Regulations amend Schedule 4 to provide that certain amounts do not count as chargeable consideration as follows:
- The payment by a tenant of a landlord’s reasonable costs on, or incidental to, the grant of a lease, or an obligation to pay such costs, does not count as chargeable consideration. Note that this will cover the reasonable costs of an extension to the lease since this is treated in law as the grant of a new lease.
- The payment by a tenant of a landlord’s costs under the statutory provisions governing the enfranchisement or extension of leases of flats and long leases of houses, or an obligation to pay such costs, does not count as chargeable consideration.
- Where there is a ‘transfer of value’ for inheritance tax purposes (including a potentially exempt transfer) or a person becomes entitled to property under a will or intestacy, then any liability or potential liability of the donee or beneficiary for inheritance tax relating to the transfer, and any payment of such inheritance tax by the donee or beneficiary or agreement by them to pay such tax, does not count as chargeable consideration.
- Where there is a disposal for the purposes of capital gains tax which is otherwise than by way of a bargain made at arm’s length (for example, a gift), or is treated as such because it is between connected persons, then any liability or potential liability of the transferee for capital gains tax on the disposal, and any payment of such tax by the donee or agreement by them to pay such tax, does not count as chargeable consideration, provided there is no other chargeable consideration for the transaction.
- An obligation on an agricultural tenant to surrender his or her entitlement to Single Farm Payment to the landlord on termination of the lease does not count as chargeable consideration.
Note that the exemption in (a) does not apply where a purchaser pays or agrees to pay vendor’s costs on the transfer of a freehold (except on the statutory enfranchisement of a lease).
As all these areas were ones where the treatment before the Regulations was in doubt HM Revenue & Customs (HMRC) will accept that the treatment in the Regulations should be applied for all transactions since the introduction of SDLT.
Finance Act 2006 measures
(1) Leases
- Variations of leases to increase the rent
By virtue of paragraph 13 of Schedule 17A Finance Act 2003 the variation of a lease to increase the rent is treated as the grant of a new lease in consideration of the increase in rent.
Finance Act 2006 restricts paragraph 13 so that unless the increase is an ‘abnormal’ increase (see below) there is a charge only if the variation takes place before the end of year 5 of the lease. This means in particular that where a lease was subject to stamp duty (not SDLT) when originally granted there will never be an SDLT charge if the lease is varied to increase the rent (but not varied in any other way) after the end of year 5. This change applies where the variation is on or after 19 July 2006.
Finance Act 2006 also puts it beyond doubt that statutory rent reviews under the legislation governing agricultural tenancies are not variations of the lease.
It follows that when calculating the net present value of the rent under such tenancies a reasonable estimate must initially be made of the rent for the first five years, with that estimate being revised by a further return after five years or once the rent for the first five years becomes certain (see SDLTM12200-12202 (page 17 of the Leases chapter) - ‘Abnormal’ increases in rent
Paragraphs 14 and 15 of Schedule 17A Finance Act 2003 provide for a charge on ‘abnormal’ increases in rent following the end of year 5. As a result of Finance Act 2006 the ‘abnormal’ increase provisions apply whether the increase is provided for in the lease or is a variation of the lease.
The Act also simplifies the definition of what constitutes an ‘abnormal’ increase. In practice only very large increases in rent (at least doubling) can possibly be 'abnormal’. The ‘abnormal’ increase provisions apply only to leases which were subject to SDLT when originally granted. - ‘Backdating’ a renewal lease
It often happens that on the expiry of a lease the tenant remains in occupation while negotiations for a new lease take place and then after a time a new lease is granted.
The term of this new lease is sometimes expressed to commence from the day after the expiry of the old lease. The normal rule in England, Wales and Northern Ireland is that the term of a lease cannot commence earlier than the date the lease is granted.
Finance Act 2006 disapplies this rule where the ‘backdating’ described above takes place so that for SDLT purposes the term of the new lease commences on the date stated in the new lease. This treatment applies only where the old lease was subject to SDLT when originally granted. This change applies where the new lease is granted on or after 19 July 2006. - Agreement for lease followed by the grant of the lease
Paragraph 5 of Schedule 17A Finance Act 2003 provides for special treatment where leases of the same premises are granted (whether at the same time or not) to take effect one after the other and the grants are ‘linked transactions’.
Finance Act 2006 makes it clear that this treatment does not apply where an agreement for lease (including, in Scotland, missives of let which do not themselves constitute a lease) is ‘substantially performed’ (and so is treated as a lease) and subsequently a lease is granted in pursuance of the agreement.
This change applies where substantial performance of the agreement takes place on or after 19 July 2006.
(2) Partnerships
- Limitation of the charge on transfers of a partnership interest
Paragraph 14 of Schedule 15 Finance Act 2003 provides for an SDLT charge on the transfer of a partnership interest where the partnership property consists of or includes land.
The charge is based on the market value of the land and the proportionate interest transferred. Finance Act 2006 restricts this charge to partnerships whose sole or main activity is investing in or dealing in land. There will no longer be an SDLT charge on transfers of partnership interests in other partnerships such as professional partnerships, farming partnerships or partnerships carrying on a trade which is not land-related.
For partnerships which are still subject to an SDLT charge on the transfer of a partnership interest Finance Act 2006 removes a potential double charge where a transfer of a partnership interest is accompanied by the extraction of money by a partner.
These changes apply to all transfers on or after 19 July 2006. - Removal of ‘actual consideration’
Under the provisions of Schedule 15 Finance Act 2003 there is a charge where property is transferred into a partnership by a partner (or someone connected with them) or is transferred by a partnership to a partner or an ex-partner (or someone connected with them).
The charge was partly based on a proportion of the market value of the land and partly based on ‘actual consideration’ given by the transferee. In practice it was not always clear what constituted ‘actual consideration’.
Finance Act 2006 removes the references to ‘actual consideration’ so that (except for some transfers where all the partners are bodies corporate) the charge is based solely on a proportion of market value.
This change applies to all transactions where the effective date is on or after 19 July 2006.
(3) Reallocation of property in a settlement
It is possible for a settlement to be made up of ‘sub-funds’, each sub-fund having particular beneficiaries. Concern has been expressed that the reallocation of property between sub-funds, which trustees may undertake from time to time to balance the interests of beneficiaries, may give rise to an SDLT charge.
We are satisfied that there is no SDLT charge where the beneficiaries are purely passive and play no part in the reallocation. Finance Act 2006 also makes it clear that a mere requirement that beneficiaries should consent to the reallocation does not of itself give rise to an SDLT charge. HMRC will apply this treatment to all reallocations since the introduction of SDLT.
(4) Alternative property finance
The reliefs for alternative property finance in sections 71A to 73 Finance Act 2003 which formerly applied only to transactions between a financial institution and one or more individuals, have been extended (with effect from 19 July 2006) to transactions between a financial institution and any person(s), individual or corporate.
