SDLT consequences of an exchange of interests in dwellings

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“The position is we have a property which is split into a ground floor and first floor flat. When the flats were created each flat was sold on a freehold basis. The two owners A and B now wish to convert the flats to a leasehold basis so that they can be sold and mortgaged.

The plan is that A will transfer his freehold flat to A and B as tenants in common in equal shares and B will transfer his flat to A and B as tenants in common in equal shares.

A and B will then grant a 200 year lease of the ground floor flat at a peppercorn rent to A and A and B will grant a 200 year lease of the first floor flat to B at a peppercorn rent.

Both A and B are owners of other residential properties.  The value of each flat is roughly £56,000.  The freehold transfers will be done in consideration for the grant of the leases back.

Owner B is a Brother and Sister and owner A is an individual.

Is the transfer of the freehold a transfer between connected parties and deemed to be at market value?

If A and B enter into a contract to transfer their respective freeholds to A and B and grant leases back, is the transfer of the freehold (if it is deemed to be at market value) equal to the value of the freehold subject to the long lease back for a nominal value?

Do the leases back qualify for lease back relief and not subject to SDLT?

If the lease is sold on, on the basis the lease back relief applied does the buyer just pay the SDLT due on the rent as the grant of the lease by the freeholders would be for nil consideration?”

Source: BLG Member 


Provided certain conditions are met, the leaseback element of a sale and leaseback arrangement is exempt from the charge to SDLT by section 57A FA 2003. The relief is only partial as the sale element of the transaction remains chargeable (as the transaction is, in effect, an exchange) and the leaseback will be consideration for that sale.

Where the parties are individuals, the conditions are that:

(a) The sale is entered into wholly or partly in consideration of the leaseback.

(b) The only other consideration for the sale is the payment of money or the assumption, satisfaction or release of a debt (or both).

(c) The sale is not by way of sub-sale;

Answering your four questions:

(1) and (2): The transfer of the half share in the freehold will be treated as taking place at the higher of market value and the actual consideration given, not because the parties are connected but because of the exchange provisions in paragraph 5 Schedule 4 FA 2003.  The market value of the sale leg depends upon whether there is an agreement, at the time of the sale, for the leaseback leg to be entered into.  Here there will be, so the market value should take this into account.  The actual consideration given will be the leaseback so that will need to be valued.

(3) Yes. The relief is claimed on the SDLT1.

(4) The third party purchaser would pay SDLT based on the consideration he gives ignoring his obligations under the lease as assignee.  The charge on rent only applies where there is the grant of a lease.

At the time of publication this response was correct however as tax legislation and practice change from time-to-time you should take specific advice before taking any action.

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