SDLT key concepts and issues that arise in practice: When does the charge to SDLT arise (part 1)

Stamp duty land tax (SDLT) was introduced in the Finance Act 2003 to replace Stamp Duty on transactions involving land. Whereas Stamp Duty was a charge levied on the stamping of documents, SDLT is a charge based on the substance of a transaction irrespective of the form in which that transaction is documented.

This means that the scope of SDLT is substantially broader than stamp duty. It is relevant where there is any acquisition of a “chargeable interest” (broadly, real estate in England or Northern Ireland) and is levied on the consideration given for that interest (or in some cases its market value). This briefing will summarise where the charge to SDLT arises and some key considerations that are easily overlooked when determining the application of the charge.

Acquisition

“Acquisition” for SDLT purposes includes the creation, surrender or variation of a right or interest in land. This means that SDLT is relevant not just to a straightforward purchase but also to many changes to rights in land such as the variation and creation of leases or interests in certain types of trust. Charges to SDLT can therefore arise unexpectedly to parties that most would not consider the “purchaser”. For example, landlords accepting the surrender of a lease can be subject to an SDLT charge as the surrender of a lease is an acquisition of that leasehold interest by the immediate landlord. In practice, anything that changes one party’s rights or obligations in relation to land can therefore be within the scope of SDLT.

Chargeable interest

SDLT only applies where the interest acquired is a “chargeable interest”. Chargeable interests are not just freehold and leasehold estates in land but encompass the benefit of obligations, restrictions or conditions that affect that land. This means that the acquisition of easements, options and restrictive covenants can all be subject to SDLT. The legislation specifies certain “exempt interests” (such as licences and tenancies at will) which are outside the scope of SDLT, but these are limited exceptions. SDLT, unlike stamp duty, very much follows the substance of a transaction and not the form. Calling an agreement between two parties a licence will not affect its SDLT treatment if, as a matter of fact, the agreement and conduct of the parties has all the hallmarks of a lease which is a "chargeable interest" for SDLT purposes.

Chargeable consideration

SDLT is charged by reference to the consideration provided for the acquisition of the chargeable interest. This is most often cash paid by a purchaser. However, “chargeable consideration” includes many types of consideration such as the taking on or releasing of debt, exchanging land or doing works on land, all of which can form part of the consideration. These types of consideration are often forgotten in practice which can lead to unpleasant SDLT surprises down the line. In particular:

1. Gifts of property
   Gifts or property are usually outside the scope of SDLT but if as result of the gift the donor is released from their obligations under a mortgage, then the value of the mortgage assumed by the done will generally be consideration that is within the scope of SDLT.
2. Exchanges
   Landlords who agree to provide tenants with another property in return for the surrender of a lease will generally fall within the exchange provisions in the SDLT legislation. This means that they can be within the charge to SDLT up to the market value of the interest they give in return for the surrender.
3. Deemed market value
   Corporate purchasers that are connected to the sellers of interests can also be subject to deemed market value rules that will require SDLT to paid on the market value of an interest transferred notwithstanding that no cash consideration is changing hands.

Purchasers should therefore take a holistic view of the agreement between the parties and consider what the purchaser is giving in return for the property and not just what cash changes hands.

Conclusion

Although introduced as a means of simplifying the stamp duty regime, SDLT is an increasingly complex tax with a broad application. Those buying, selling, or dealing in land should carefully consider the substance of their transactions and seek professional advice where there is uncertainty about the application of SDLT. To continue reading about key SDLT concepts and issues that arise in practice click here for part 2.

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