UK: Stamp Duty Land Tax: Budget Changes

Originally published March 2005

In his pre-Election Budget Gordon Brown has announced some surprisingly extensive changes to the SDLT regime which requires all parties in the Real Estate market to review their SDLT strategy.

In a surprise measure the Government has abolished with immediate effect the unlimited exemption from SDLT for commercial properties in Disadvantaged Areas. Only transactions which have exchanged contracts on or before 16 March will continue to obtain the exemption and even then the contract must not be varied. Options do not count as contracts for this purpose.

This measure will affect not only the purchase of property but also tenants taking rack rent leases which have up until now been spared the steep lease duty rise brought in with SDLT in December 2003.

Parties to transactions in Disadvantaged Areas should now review whether they can implement structures to avoid the new charge.

Where contracts have already been exchanged care should be taken to ensure the contract is not varied, sub-sold or assigned so that the relief is lost. Tenants under leases where relief was previously secured should also be aware of the possibility of a charge now arising on the occasion of a variation or renewal of the lease.

The exemption for residential property up to £150,000 in value remains. However care needs to be taken with properties at the margin. For example, previously the ‘commercial’ treatment of the purchase of six or more residential properties was favourable but this will now work against buyers by bringing such properties into the full SDLT charge.

The government have acted to block a number of established SDLT schemes with immediate effect. These are:

• certain SPV structures relying on group relief;
• ‘undertaking’ schemes involving the transfer of let property;
• schemes in which a capital sum is paid for a lease variation;
• schemes involving artificial forms of consideration. However these rules do not apply where contracts were entered into on or before 16 March. Again if contracts have been entered into care needs to be taken to ensure the contract is not varied, assigned or sub-sold. Further, there are a number of schemes which still survive and should be considered.

Notwithstanding the new anti-avoidance measures the use of company SPVs still work where reliance is not placed upon group relief.

Depending on the structure adopted there may be a charge at ½% but in some places the structure can be implemented at the last minute when there are’"arrangements’ in place with the buyer.

It is still possible for sellers to transfer property into a unit trust structure and sell it to the buyer free of SDLT.

The Revenue still accept that so called ‘Prudential’ Schemes work under the SDLT regime. In essence the seller contracts to sell bare land for a certain amount but also contracts to construct a building on the land. Provided certain conditions are met SDLT will only be payable on the land element.

The Government have in this Budget extended the general notification regime for avoidance schemes to include SDLT schemes on commercial property over £5m. The details of how this will operate in practice are not yet clear but either the promoter of the scheme or, where legal privilege is claimed, the parties will be obliged to notify the Revenue that they have implemented an SDLT scheme. Such notification strictly has no bearing on the effectiveness of the relevant scheme but provides the Revenue with notification so that, if they wish, they can either challenge that scheme or bring forward anti-avoidance measures to block them.

This has been a surprisingly eventful Budget for SDLT planning. We will need to see the detail in the Regulations and Finance Bill as they are published but it is clear that parties in the Real Estate market will need to review their strategy in Disadvantaged Areas and further consider going forward their general approach to SDLT planning in light of the new rules.