Stamp Duty Land Tax ("SDLT") liability can be a significant factor for developers to consider when considering purchasing land with an associated construction contract. The challenge arises in determining what consideration should be taken into account when calculating the SDLT liability. The question to be addressed is whether SDLT is due on the value of the land or on the cost of the land and the subsequent development.
Development agreements themselves are not land transactions for the purposes of SDLT and on their own would not give rise to a SDLT liability. However, if the consideration for a land transaction consists of, or includes construction obligations, it is possible that the value of the works could be chargeable consideration and therefore included in the calculation for SDLT greatly increasing the amount due.
These issues were considered in the case of Prudential Assurance Company Limited v Inland Revenue Commissions (1992) ("Prudential").
The rule set out in Prudential means that:
- where a purchaser of land buys the site for one consideration and enters into a building contract under which the seller agrees to carry out the construction works for the purchaser for another consideration,
- the price paid under the building contract is not taken to be account for the sale unless the transactions are so intertwined that, in reality, the purchaser is buying the land with a completed building on it.
When the new SDLT regime was introduced in 2003 the rule in Prudential was set out in the legislation in more specific terms (Schedule 4 of the Finance Act 2003).
When determining on what consideration SDLT will be payable thought should be given to both Prudential and the Finance Act. In development transactions whereby the seller has construction obligations, the amount paid in relation to the seller's obligations to carry out the works is chargeable consideration for SDLT purposes if both the sale and construction obligations are "in substance one bargain".
If the sale itself and the construction works are self-contained transactions, SDLT is only payable on the land price. In Prudential the minimum requirements for this were that the bare land was conveyed to the purchaser before construction works began and that neither the purchaser nor the seller are entitled to unwind the land transaction if the construction contract unravelled. For instance, if the buyer has no intention of purchasing the land unless the construction works are carried out then the buyer is effectively acquiring the land together with the constructed property and the contracts are not independent. As such, the consideration for SDLT purposes would likely be the cost of the land and the works.
The difference in the consideration of the land alone or the combined value of the land and the construction works is likely to be significant. As such, if the consideration for SDLT purposes is the value of the land alone, the SDLT saving could be substantial.
Purchasing land with an associated development contract is a complex and niche area of law which requires specialist advice. Here at Herrington Carmichael, our Real Estate and Commercial teams work closely together on these transactions in order to provide specialist advice and assistance in respect of both the construction element of your transaction as well as the pure land transaction.
Construction contracts set out all terms on which the works will be carried out and as such, a great deal of consideration must be given to the fundamentals of the project which will dictate the provisions of legal documents. The developer and purchaser will need to discuss more than simply price and timings and will also need to consider (amongst other things) the below:
- Scope of the works: What works are to be carried out? Is design to be included as well as build? The scope will also include the type of construction to be performed, specification of the products, access and logistics of the site. These provisions are the heart of the contract and will assist us in advising what form of construction contract is appropriate for your transaction.
- Contract price: This is the consideration payable for the works. The developer must consider whether they are willing to take a flat fee or if this will be subject to a formula based on costs incurred. Consideration should also be given as to whether payments will be made in tranches and what obligations must be satisfied to trigger a payment.
- Variations: Construction projects change throughout and unanticipated difficulties crop up. Understanding how to value variations, agree and implement changes to the project and the associated cost of those changes is critical.
- Timings: When are the works to be completed? Are the works to be completed in phases and will completion dates be set for each phase? Consideration also needs to be given to the different trades involved and how they fit into the structure of the project.
- Payment regimes/schedules: What payment regime will apply? Who will certify payments? Will a retention mechanism operate?
- Obligations & responsibilities: Who will take on the responsibility for the necessary insurance policies and what level of insurance is required? Who is responsible for site condition risk, trespass etc.
- Funding: What funding arrangements are in place? What are the requirements of any lender, and will this affect the structure of the transaction or timings and payment schedules?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.