Tax - Stamp duty land tax - Starting over on stamp duty

It is probably best to regard the new stamp duty regime as a complete new tax, and full use should be made of available reliefs, says Peter Rayney.

The new Stamp Duty Land Tax (SDLT) regime started on 1 December 2003 and effectively replaced stamp duty on land and property transactions.

It is probably best to regard SDLT as a completely new tax. Whilst in some ways SDLT may appear to resemble the prior 'stamp duty' system, its legal mechanics and 'self-assessment' based compliance system are very different.

One of the main aims of SDLT is to break the 'link' with legal documents, thus enabling the tax to apply to e-conveyancing (expected in 2006). In contrast to stamp duty, SDLT is effectively a mandatory tax since it does not rely on the existence of a legal document or the legal completion of a land transaction. Thus, for example, it is no longer possible to avoid duty by 'resting on contract'.

Broadly, SDLT only applies to UK land and property transactions, such as:

•   the acquisition of freehold or leasehold interests; or

•   the grant or variation of leases;

from 1 December 2003.

Transitional provisions apply for land and property contracts substantially completed between 10 July 2003 and 1 December 2003. One notable impact of the SDLT regime is to completely remove any 'stamp duty' charge on the assignment of debts. (Stamp duty on the sale of goodwill and intellectual property was already exempted from duty on 22 April 2002 and 28 March 2000 respectively.)

In this article I review the basic SDLT rules for property transactions.

(It should be noted that the existing stamp duty rules continue to apply to shares, including shares in property companies, which attract duty of fi%.) All statutory references are to the Finance Act 2003, unless stated otherwise.

Basic charging rules

SDLT is imposed on UK land transactions and is payable by the purchaser (s 42). Under s43, a 'land transaction' represents an 'acquisition' of a 'chargeable interest'. This means that tax is payable not only on a normal land sale and purchase but also on the creation, release, surrender, or variation of a chargeable land interest. This clearly includes the grant of a lease, which is subject to special rules (see below).

Broadly, SDLT is payable on the 'completion' of a land transaction. However, the SDLT charge is brought forward where a land transaction is 'substantially performed', such as where a substantial (90%) amount of the consideration is paid (this also includes the first 'rent' payment on a lease) or where the purchaser takes possession (eg, occupation).

The purchaser, broadly the person acquiring the relevant land interest (s 43(4) and (5)), must submit their 'self-assessed' land transaction return (SDLT 1) and pay the relevant SDLT within 30 days from the 'effective date' ie, normally when the contract is completed or substantially performed (ss 77 and 86).

SDLT rates

SDLT (at the appropriate rate) is applied to the chargeable consideration for the relevant land transaction. Different tax rate scales apply to residential property and non-residential or 'mixed-use' property. The relevant rates are shown in Panel 1. These are applied on the so-called 'slab system': where the consideration exceeds the relevant threshold, the higher rate of SDLT is applied to the total amount.

It is clearly important to identify whether the property being acquired constitutes residential property. Residential property is defined in s116 and includes buildings that are used or suitable for use as dwellings, their accompanying gardens and grounds, residential accommodation for school pupils and students (other than those in higher education). Certain buildings, such as hospitals, hotels or care homes are effectively deemed to be non-residential (s 116). Given the fairly wide coverage of the 'disadvantaged area' relief, it is always worth first checking to see whether the relevant property falls to be exempt under this relief (see below).

The application of a nil or lower rate of SDLT also depends on the relevant land transaction not being part of a linked transaction. Broadly, linked transactions are those made as part of a single scheme or arrangement between the same vendor and purchaser (or their 'connected' parties).

If the transaction is linked, the rate of SDLT is fixed by reference to the total consideration for all the linked transactions (s 55(4)).

Chargeable consideration

SDLT is levied on the 'chargeable consideration', which includes money or money's worth. Where the purchaser assumes an existing liability of the vendor/transferor (such as an existing property mortgage), this forms part of the chargeable consideration for these purposes. Where the purchaser or tenant carries out work on the property (on the vendor's/landlord's behalf) or performs services, the open market value of such work or services is also regarded as chargeable consideration (s 50 and Sch 4). However, para 10, Sch 4 prevents the value of post-acquisition development or construction work carried out by the purchaser being treated as consideration.

Where VAT is actually charged on the sale (for example, on the sale of new (ie, no more than three years old) commercial property or where an option has been made to tax the relevant property), SDLT must be applied to the VAT inclusive consideration. However, this is not the case where VAT becomes chargeable following an option to tax being made after the 'effective date' of the transaction for SDLT.

Where the consideration relates partly to a land transaction and other assets (for example, moveable plant and machinery), then the apportionment must be made on a 'just and reasonable' basis. Thus, for example, where the trade and assets of a business are being acquired, it will be sensible to ensure that the amount allocated to the trading property is made on a defensible basis. See Panel 2 for a worked example of the SDLT payable on a trade and asset purchase from a third party.

Special rules apply to leases (see below) and where properties are exchanged (SDLT effectively being applied to both sides of the transaction).

Contingent or uncertain deferred consideration

The SDLT treatment of deferred consideration depends on whether it is:

•   contingent; or

•   uncertain or unascertained.

Contingent consideration (ie, a fixed amount that is payable or ceases to be payable if some future event occurs) is initially brought into account for SDLT purposes on the basis that it will be payable - the contingency is therefore disregarded. Where the deferred consideration is uncertain or unascertainable, the SDLT return (and hence the SDLT payable) is initially based on a 'reasonable estimate' of that future consideration. The purchaser can elect to defer the payment of the SDLT where at least one tranche of any contingent or uncertain consideration is payable six months after the effective transaction date (s 90).

The original SDLT liability is subsequently adjusted when the circumstances surrounding the contingency are resolved or where the (initial) unascertainable consideration becomes determined. This is done by making a further SDLT return within the normal 30-day period.

Deemed 'market value' rule

Special rules apply where land and property is transferred to a company connected with the transferor, such as on the incorporation of a sole trader or partnership business. In such cases, the SDLT 'consideration' is deemed to be (not less than) market value, subject to any 'disadvantaged area' exemption etc (s 53).

The overall effect of this rule is to treat the trading property as passing to the company at its market value for SDLT purposes, irrespective of any actual consideration that may be given by the company. Thus, if the property is gifted or transferred at an under-value amount to the company, under the protection of a s165, TCGA 1992 (business asset hold-over) election for CGT purposes, SDLT would still be calculated by reference to the market value of the property. Similarly, the 'market value' rule still applies where the business is transferred to the company in exchange for shares, using the special incorporation relief in s162, TCGA 1992.

Disadvantaged area relief

Non-residential (eg, commercial) property situated in a 'disadvantaged area' is completely exempt from the charge to SDLT, regardless of the amount of the consideration. Residential property in such areas is exempt provided the sale consideration does not exceed 150,000. It is worth noting that this relief is applied to both new and existing properties (Sch 6). Currently there are around 2,000 designated 'disadvantaged areas' in the UK. These can be checked in advance of any proposed transaction on the Inland Revenue's website (

The search is made on a 'post-code' basis.


SDLT computations for leases are substantially different from those performed under the previous 'stamp duty' system. In broad terms, the SDLT payable on the grant of a lease is broadly based on 1% of the net present value (NPV) of the rent (currently applying a 3fi% discount rate to the rent received). The same 1% rate applies for both residential and non-residential property. Here, however, SDLT is charged on the 'slice' system, so that the amount charged:

•   on commercial property is based on the amount by which the NPV of the rental stream exceeds 150,000; and

•   on residential property is based on the excess of the NPV of the rental stream over 60,000.

There are detailed rules for determining the 'rent' payable over the lease (including rent reviews and variable/formula-based rents) and the term of the lease.

A separate SDLT charge arises on lease premiums received on the grant of the lease. Where the annual rent exceeds 600, the premium (irrespective of the amount) is taxed at 1%.

In contrast, a (mere) licence to occupy does not attract any SDLT charge (since it is regarded as an exempt interest (s 48(2)). This distinction may be important for many owner-managed companies where the trading property is personally owned by the proprietor and made available for use in the company's trade. In such cases, the proprietor may be prepared to grant the company a licence to occupy to avoid incurring an SDLT charge.

Intra-group transfer relief

Land and property can be transferred between members of a (75%) group without any SDLT liability under the intra-group relief rule in para 2, Sch 7. (The SDLT 'group' definition is similar to that used for corporate capital gains purposes, which broadly consists of the 'parent' company and its 75% subsidiaries.)

The intra-group transfer relief is subject to certain anti-avoidance provisions (along the lines of the corresponding stamp duty rules). Thus, intra-group transfer relief would be denied where arrangements are in existence for the transferee company to leave the group (for example, as a result of it being sold-off). The intra-group transfer relief is clawed back if the transferee company actually leaves the group within three years

Corporate reconstruction reliefs

As with stamp duty, the incidence of SDLT can often be a significant factor in structuring a corporate reorganisation: the failure to obtain relief on a reconstruction involving property assets is likely to prove expensive.

Where there is a 'pure' reconstruction with the demerged businesses remaining under the same 'common' (mirror-image shareholding) ownership, then any property transfers taking place under the reconstruction would be completely exempt from SDLT (para 7, Sch 7). If the share ownership is split, with the relevant businesses being owned by different shareholder groups (such as on a 'partition' arrangement) it should be possible to obtain a reduced SDLT charge under the 'acquisition relief' provisions. Acquisition relief enables any properties included in the businesses transferred to be charged at a reduced rate of 0.5% (para 8, Sch 7). (Similar 'stamp duty' reliefs continue to apply for transfers involving shares.)

Any reconstruction or acquisition relief is effectively clawed back where the recipient company is sold to a third party within three years of the original transfer (para 9, Sch 7). The additional SDLT is based on the value of the property at the date of the original transfer and is payable on making a further 'corrective' land transaction return under s81. This must be made within 30 days of the company being sold.

•   Peter Rayney FCA FTII TEP is a tax partner with BDO Stoy Hayward's Midlands Tax Consultancy Group, where he advises owner-managed companies and provides a consultancy service to accountants and lawyers. He is author of The Practical Corporate Tax Manual, published by CCH. To purchase a copy call 0870 7772906

PANEL 1: SDLT rates Residential property Non-residential or mixed-use property Chargeable consideration Rate Chargeable consideration Rate Up to 60,000 Nil Up to 150,000 Nil 60,001- 250,000 1% 150,001- 250,000 1% 250,001- 500,000 3% 250,001- 500,000 3% More than 500,000 4% More than 500,000 4% PANEL 2: SDLT payable on a trade and asset purchase On 31 December 2003, In Dulci Jubilo plc purchased the trade and assets (including goodwill) of Gaudete Ltd's successful computer game software design and development business for a total consideration of 4.1m. The sale and purchase agreement allocated the consideration as follows: '000 Freehold property (including immovable fittings and fixtures) - not located in a disadvantaged area 1,200 Goodwill 2,500 Computer and office equipment 580 Debtors 270 Creditors (450) Cash consideration 4,100 A SDLT liability of 48,000 (ie, 4% x 1.2m) only arises on the freehold property (including the immovable fixtures). No duty arises on the other assets. Note that In Dulci Jubilo plc would obtain corporate tax relief on the amount paid for goodwill based on the amount amortised in its accounts each year. Capital allowances would also be claimed on the computer and office equipment.
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