SDLT is a new tax which is designed to replace stamp duty on property transactions. It will apply to transactions that are completed on or after 1 December 2003 subject to the application of transitional rules. Stamp duty in relation to property transactions will cease to apply to documents executed on or after 1 December 2003.
This note is the first in a series of planned notes on SDLT. Future notes will cover both the overall structure of the tax as well as its application to specific areas such as leases, developments and complex transactions eg PFI and securitisations. The new compliance regime and the administration of the tax will also be covered.
The purpose of this note is to highlight the transitional rules that apply to transactions that are completed on or after 1 December 2003 but pursuant to contracts entered into prior to the introduction of the SDLT regime.
LEASES
Broadly, SDLT will apply to leases as follows:
- It will be charged on the Net Present Value ("NPV") of rents payable throughout the term of the lease.
- SDLT will be charged at 1% of NPV unless this falls within the exempt threshold (£150,000 for commercial leases and £60,000 for residential leases).
- The NPV is calculated by applying a formula (this discounts rents by 3.5% per annum).
- Rent reviews more than 2 years after the lease are ignored when calculating NPV.
- In relation to turnover rents a reasonable estimate will need to be made on lease completion and recalculated periodically.
- The disadvantaged areas exemption will provide some benefit.
Example
Stamp Duty
Initial rent per annum
£500,000
Term of lease
20 years
Rate of duty
2%
Stamp duty
£10,000
SDLT
NPV of rents
£7,106,202
SDLT at 1%
£71,062
% Increase (comparison of stamp duty and SDLT)
711%
Transitional Rules
- A lease completed before 1 December 2003 is outside SDLT. A lease completed on or after 1 December 2003 where the agreement for lease was executed on or before the Finance Bill receives Royal Assent (currently expected in the week commencing 13 July) will be outside SDLT unless the agreement for lease is varied or assigned after Royal Assent. As the Finance Bill currently stands it is also arguably outside the scope of stamp duty although the position could change before 1 December.
- A lease completed on or after 1 December 2003 where the agreement for lease was executed after Royal Assent will be subject to SDLT.
What to do next
- Exchange as many agreements for lease as possible prior to Royal Assent but note the fourth point below.
- Complete as many leases as possible prior to 1 December if SDLT will otherwise apply but bear in mind that if an agreement executed on or before Royal Assent is completed on or after 1 December as things stand both SDLT and stamp duty could be avoided although it is quite likely that this position will be reversed before 1 December.
- Consider taking a lease of an uncompleted new build or refurbished unit before completion and before 1 December 2003. This is legally possible although suitable protection for both landlord and tenants needs to be built in.
- Avoid having to vary or assign an agreement for lease executed on or before Royal Assent.
SALES
Broadly SDLT will apply to sales as follows:
- SDLT will be chargeable at the same rates as the current rates for stamp duty except that the current £60,000 exemption is increased to £150,000 for commercial sales.
- The disadvantaged areas exemption will provide some benefit.
Transitional rules
- A contract completed before 1 December 2003 is outside SDLT.
- A transaction completed on or after 1 December 2003 pursuant to an agreement executed after Royal Assent will be subject to SDLT. If any stamp duty has been paid on the contract (eg under s115 Finance Act 2002 where the price exceeds £10M and completion is not effected within 90 days of the contract) this will be set against the SDLT liability.
- A transaction completed on or after 1 December 2003 pursuant to an agreement executed on or before Royal Assent will be outside SDLT unless the agreement has been varied or assigned after Royal Assent.
- Under the Finance Bill as currently drafted, where a contract to purchase land is entered into on or before Royal Assent and a contract to sub sell the land is entered into after Royal Assent not only will the second contract be within SDLT but so too will the first contract. Sub sale relief is not currently available for SDLT and therefore SDLT would be payable on both sales.
- Although the Finance Bill is not clearly worded on this point, it seems that where a contract entered into on or before Royal Assent has been "substantially performed" (but not completed) and the purchaser sub sells after Royal Assent the second contract will be within SDLT but the first contract will not. A substantially performed contract is essentially a contract under which the purchaser has gone into possession and/or paid the whole or substantially the whole of the purchase price (eg under the so-called split title schemes).
What to do next
- Exchange before Royal Assent if possible but consider whether there is a real advantage. If completion will take effect before 1 December 2003 it will be outside SDLT in any event. If there is no likelihood that the contract might be sub sold or assigned, the same amount of tax may be payable under the SDLT regime as would be payable under the stamp duty regime although the SDLT compliance regime will apply.
- Exercise extreme care before varying, novating or assigning a contract entered into on or before Royal Assent since a variation, novation or assignment after Royal Assent will automatically bring the transaction within the SDLT regime, and as things currently stand, without any materiality requirement.
- Exercise caution before contracting to sub sell land after Royal Assent. In the case of contracts that have been substantially performed before Royal Assent these should be protected. Although the Finance Bill is not itself clear on this, the Chief Secretary to the Treasury has made a clear statement to Parliament that it is the Government's intention that these contracts should not be brought within the charge to SDLT. This is particularly welcome to those taxpayers that have acquired land by resting on contract under the split title nominee scheme.
- For contracts that have not been substantially performed by Royal Assent, these will be brought within the charge to SDLT if a sub sale contract is entered into after Royal Assent and completed on or after 1 December 2003. However, the Chief Secretary to the Treasury has made statements in Parliament indicating that the Government is considering giving sub sale relief where contracts have not been substantially performed. This is the subject of consultation and in the meantime caution should be exercised and advice taken on the current position before carrying out a sub-sale.
- Consideration may be given to delaying the completion of contracts entered into on or before Royal Assent until on or after 1 December 2003. In the normal case, the transaction will not fall within the SDLT rules but as the Finance Bill currently stands, neither will stamp duty apply. However, it seems quite likely that this will change before 1 December 2003 so that if a transaction does not fall within the SDLT regime it will nevertheless be subject to stamp duty. In the meanwhile do consider delaying completion if that is possible, always having in mind the 90 day rule where the agreement is subject to s115 Finance Act 2002
Options
Earlier statements made by the Government indicated that contracts arising from the exercise of existing options would fall outside the SDLT regime. The Finance Bill as it currently stands does not do this and therefore transactions completed on or after 1 December following the exercise of an option after Royal Assent will be within the SDLT regime unless the Government has a further change of heart.
SDLT rules are subject to change
In relation to SDLT it is particularly important to take advice before acting not only because the rules are complex but also because the rules as currently set out in the Finance Bill may change before it is enacted. It should also be noted that the Treasury will be given very wide powers to amend the legislation before it becomes operative and therefore significant changes are possible before 1 December.
