SDLT – Multiple dwellings relief and sale and leaseback relief
Property Tax, Stamp Duty Land Tax
A building consisting of two floors of offices above a shop was owned by the trustees of a small self-administered pension scheme (SSAS). The trustees, Mr and Mrs J, owned the freehold in their capacity as trustees and were also the beneficiaries of the SSAS which had been set up by their employer (E Ltd). E Ltd was wholly owned by Mr and Mrs J. Work was nearing completion on the conversion of the offices into flats. The four offices would become four flats.
The SSAS could only invest in commercial property so before the conversion into flats was completed SSAS had to dispose of its interest in that part of the property. The proposal was that SSAS would hold a long lease of the shop, E Ltd would own the freehold reversion and new long leases of two of the flats, and Mr and Mrs J would hold new long leases of the remaining two flats. This would be achieved by the following steps:
- SSAS would grant 999 year leases of Office/Flat A and Office/Flat B at a peppercorn rent to E Ltd.
- SSAS would grant 999 year leases of Office/Flat C and Office/Flat D at a peppercorn rent to Mr and Mrs J.
- SSAS would the freehold reversion in the property to E Ltd, subject to there being a leaseback of the shop.
The consideration for the grant of the leases by SSAS had to be market value because they were transactions between a pension fund and connected parties. Approximate values of the flats when complete were:
Flat A: £125,000 – £130,000
Flat B: £150,000
Flat C: £150,000
Flat D: £125,000 – £130,000
The value of the leaseback of the shop was £400,000.
Advice was sought on the SDLT consequences of the proposed transactions.
Overview of SDLT advice
As E Ltd and Mr and Mrs J were ‘connected’ with each other the proposed transactions between SSAS as vendor and E Ltd and Mr and Mrs J as purchasers will be ‘linked’ for SDLT purposes. This meant that, in the absence of a relief, the consideration for the grant of the four new residential leases would be added together to determine the rate of tax. As the total consideration for the residential element exceeded £500,000 the 4% rate would apply however multiple dwellings relief should apply to reduce the rate to 1%. In relation to the sale of the freehold and leaseback of the shop, sale and leaseback relief should be available meaning that only the market value of the freehold after the leaseback would be chargeable to SDLT.
Multiple dwellings relief (MDR)
MDR applies to ‘relevant transactions’. In order for a transaction to be a relevant transaction the transaction must involve the acquisition of two or more dwellings. Where an acquisition is of a single dwelling a transaction can still be a relevant transaction if it is linked to another acquisition of a dwelling or dwellings. In determining whether a transaction is a relevant transaction, superior freehold or leasehold interests in dwellings subject to leases granted for a term of 21 years or more are ignored.
If relief is claimed for a relevant transaction, Schedule 6B operates to set the amount of tax chargeable in respect of the transaction, drawing a distinction (if necessary) between the relevant part of the consideration apportioned to dwellings to which MDR applies and the remainder of the consideration to which MDR does not apply. The rate of tax that applies to the dwellings consideration is that which would apply under section 55 of FA 2003 if the consideration were the fraction produced by dividing the consideration given for the transaction (and any linked transactions) attributable to dwellings that are the subject of relevant transactions by the total number of dwellings (subject to a minimum rate of 1 per cent). The rate of tax that applies to the remaining consideration is the rate that would apply in the absence of MDR.
Paragraph 7 Schedule 6B sets out rules for determining what counts as a ‘dwelling’ for the purposes of MDR.
MDR must be claimed by completing the land transaction, checking Box 9 to show that a relief is being claimed and inserting Code 33 (MDR).
Transactions are ‘linked’ if they form part of a ‘single scheme, arrangement or series of transactions between the same vendor and purchaser or, in either case, persons connected with them’ (section 108 Finance Act 2003). ‘Arrangement’ is not defined. Where transactions are linked, section 55(4) FA 2003 provides for the rate of tax to be determined, in accordance with the table in section 55(2) by reference to the total chargeable consideration for all the transactions.
Here the seller will be the same (SSAS) and all the purchasers will be ‘connected’ with one other. The test of connection is that in section 1122 Corporation Tax Act 2010. The mere fact that transactions are between the same parties (or parties connected with them) does not make them linked. There is a ‘series of transactions’ where the transactions are entered into sequentially and there is some integral connection or inter-dependence (see Attorney-General v Cohen  1 All ER 27).
Sale and leaseback relief
Provided certain conditions are met, the leaseback element of a sale and leaseback arrangement is exempted from the charge to SDLT by section 57A FA 2003. The sale element of the transaction remains chargeable on its market value (as the transaction is, in effect, an exchange).
The market value of the sale leg will depend upon whether there was an agreement, at the time of the sale, for the leaseback leg to be entered into. If there was, the market value of the sale leg should take this encumbrance into account (and value any rent obtainable from the leaseback). If there is no such agreement, the market value of the sale leg is the unencumbered value.
A ‘sale and leaseback’ arrangement is defined in section 57A (2) as an arrangement under which A transfers or grants to B a ‘major interest’ in land (the ‘sale’), and, out of that interest, B grants a lease to A (the ‘leaseback’). The leaseback must therefore be to the person who sold the major interest. A ‘major interest’ is defined in section 117(2) FA 2003 (in relation to England and Wales) as a fee simple absolute or a term of years absolute at law or in equity.
Relief must be claimed by completing the land transaction return by checking Box 9 to show a relief is being claimed and inserting Code 28 (‘Other relief’).
Update (at 1 April 2016)
MDR continues to apply after the introduction of higher rates of SDLT on the acquisition of additional dwellings from 1 April 2016. MDR is considered in more detail (including an example of its application after 31 March 2016) here.
At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.