In part 1 we summarised where the charge to stamp duty land tax (SDLT) arises and some key considerations when determining the application of the charge. This briefing will consider two further key concepts in the SDLT legislation that were introduced to combat avoidance under the old stamp duty regime. Nearly 20 years after SDLT was introduced these provisions now raise a number of practical considerations around the amount and timing of SDLT.
It was a well-known Stamp Duty avoidance mechanism to “rest on contract”. Purchasers could pay the purchase price and occupy a property under the terms of a contract but never complete the transaction with a transfer document, which avoided the payment of duty.
When SDLT was introduced, it therefore included the concept of substantial performance. A contract is “substantially performed” where either the whole or substantially the whole of the price is paid or the purchaser occupies the whole or substantially the whole of the property.
These provisions can cause problems in both commercial and residential purchases where some access to the property is required prior to completion. Access is often requested to carry out preliminary works to the property or for contractors to assess the property so that works can commence on completion. Although it is common for licences to be put in place for these purposes, it is nevertheless possible for possession to be taken of a property notwithstanding a temporary licence being in place. HMRC considers that substantial performance occurs when the purchaser obtains the “keys to the door” and purchasers therefore need to be incredibly careful that any time spent in the property does not amount to rights equivalent to that of the owner. Any preparatory works to the property should ideally take place after completion to avoid triggering substantial performance and any time spent on the property should be under a restricted licence that includes the requirement to give notice to the owner, restricts the activities of the purchaser and their contractors and provides only limited access at limited times.
Understanding substantial performance is also important for SDLT compliance as it determines the “effective date” of the transaction and therefore when the clock starts to run for SDLT filing and payment obligations. Generally, the effective date of a transaction is the date of completion and the SDLT return, and payment is due either 14 or 30 days after that date. Where a contract is substantially performed prior to completion, it is the date of substantial performance that will trigger the timelines for notification and payment. When a transaction subsequently completes, there may then be further notification and payment obligations. Purchaser should take care not to unintentionally trigger substantial performance so that penalties and interest are not due because of a failure to meet notification and payment deadlines.
For SDLT purposes, 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, people connected with them”. This definition is designed to be deliberately broad to prevent parties artificially splitting land transactions to benefit from the nil rate band on each transaction. It therefore does not matter whether transactions complete on the same date or are documented separately if as a matter of fact they form part of the same deal or agreement between the vendor and purchaser.
Where the rules apply, for the purposes of calculating the SDLT due the transactions are treated as if they were a single transaction and the SDLT will be calculated on the total consideration for all the transactions. Linked transactions also affect the purchaser’s SDLT compliance obligations. Where linked transactions have the same completion date, then a single land transaction return can be completed (but does not have to be). Where there are different completion dates, there will not only need to be separate returns but there will need to be an apportionment of the SDLT due between the transactions and the returns must be marked as linked. This can sometimes lead to further SDLT being due on the original transaction and further returns needing to be filed with HMRC.
Although the linked transaction rules are generally straightforward, the way that they interact with other SDLT provisions can be more complicated. The simplest example is where commercial and residential properties are purchased in linked transactions. If any of the land purchased in any of the linked transactions is non-residential, then the non-residential rates will apply to the entirety of the purchase. In the same vein their application can result in one transaction being taxed at the standard rates of SDLT and another at the higher rates. This can cause problems with determining not just the SDLT due on each transaction but in the mechanics of reporting and payment. Professional advice should be sought to assist in determining the position.
Although initially introduced as anti-avoidance measures both the substantial performance and linked transaction rules can complicate the tax and compliance obligations for purchasers. If you would like to read more about key SDLT concepts and issues that arise in practice click here for part 1.
If you require further information about anything covered in this briefing, please contact Katjana Cleasby or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2023