Excerpt from; Stamp Duty Land Tax Guide For Property Investors.
Purchase Vacant Land for Development
(Strategies Using SDLT Reliefs & Classifications)
| Section Summary: This section explores strategies to minimise Stamp Duty Land Tax (SDLT) when purchasing land for development. Key Points:
Main Principles: The main principle is to carefully select and plan land purchases to qualify for lower SDLT rates, considering both the land’s history and intended development use. |
Minimising Stamp Duty on Property Development
(Strategies Using SDLT Reliefs & Classifications>Purchase Vacant Land for Development)
➤ Buying undeveloped land for development typically results in lower Stamp Duty Land Tax (SDLT), especially if the land has not been previously used residentially, helping to avoid higher SDLT rates.
Here are strategies and considerations to help minimise stamp duty liability.
Buying Land for Development
Key Points
- Lower SDLT Liability: Purchasing land without existing buildings for development typically incurs lower SDLT charges compared to buying developed land or properties.
- Watch Out for Previous Residential Use: Land that was previously used residentially, such as a garden belonging to a dwelling, may still be considered residential property for SDLT purposes at purchase.
SDLT on Residential Property
HMRC defines residential property for SDLT purposes as:
- Any building that is used, or suitable for use, as a dwelling, or is in the process of being constructed or adapted for such use.
- The garden or grounds of the building, including any structures on that land.
- Any interest or right over land that benefits a dwelling, like a right of way.
Strategies for Minimising SDLT
- Direct Land Purchase for Development:
- Buying undeveloped land can result in lower SDLT since the land is not yet developed into residential properties.
- Ensure the land has not been designated or previously used as residential land to avoid higher SDLT rates.
- Consider the Final Use:
- Plan the development carefully. If the end goal is residential properties, understand the potential SDLT implications.
- Developing multiple dwellings on the purchased land will subject the transaction to residential SDLT rates, potentially including the 3% higher rate for additional properties.
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Development Scenarios and Their Impact on SDLT
(Strategies Using SDLT Reliefs & Classifications>Purchase Vacant Land for Development)
➤ Different development scenarios impact SDLT rates, with considerations like prior residential use and development agreements influencing potential tax liabilities.
Scenario 1: Direct Purchase and Development
- Action: You buy undeveloped land directly, intending to develop it into residential properties.
- Consideration: Ensure the land has no prior residential use to qualify for lower SDLT rates. Plan the development phase to manage SDLT implications upon sale or lease of the new dwellings.
Scenario 2: Development with a Pre-existing Option Agreement
- Action: An option agreement (Further reading on option agreements below) is made with the landowner to develop the land and then complete the purchase once the development increases the land’s value.
- Consideration: This approach can significantly increase SDLT liability since the value of the land post-development (with new dwellings) will be much higher, and the transaction will be subject to residential SDLT rates, including the additional 3% rate if applicable.
Scenario 3: Buying Land Previously Used Residentially
- Action: Purchasing land that was previously part of a residential property’s garden or grounds.
- Consideration: Even if the land is undeveloped, its previous association with a residential property may subject the purchase to residential SDLT rates. Thoroughly investigate the land’s history and use it to assess potential SDLT charges.
| Further reading. Option Agreements for Property Developers Option agreements allow developers to secure the right to purchase land within a specified period without the immediate obligation to buy. This approach offers developers the flexibility to assess and obtain necessary planning permissions, ensuring the viability of a development project before committing to a purchase. What is an Option Agreement? An option agreement is a legal contract between a landowner and a prospective buyer, typically a developer. The agreement grants the developer the right, but not the obligation, to purchase the land at a later date within a defined period. For this right, the developer pays the landowner an option fee. Advantages for Both Parties
Exercising the Option To exercise the option, developers typically must serve an ‘Option Notice’ to the landowner and pay a deposit. This action converts the option into a binding purchase agreement, with terms for completion as outlined in the original option agreement. Alternative Contracts: Conditional Contracts Conditional contracts are another route, where the sale proceeds only if certain conditions (e.g., obtaining satisfactory planning permission) are met. While offering security for developers, these contracts can bind the developer to purchase, giving more leverage to the landowner if conditions are met. Practical Considerations Before entering an option agreement, several factors need consideration:
Stamp Duty Land Tax (SDLT) Considerations Generally, SDLT is not payable on the option fee itself when the option is granted. However, once the option is exercised and the land purchase proceeds, SDLT becomes payable based on the total consideration paid for the land, which includes the initial option fee and the purchase price. The timing and amount of SDLT can vary depending on when the option is exercised and the specifics of the transaction. Duration and Expiry The duration of an option agreement can vary, typically ranging from 1 to 10 years, depending on the development’s scale and complexity. If the developer chooses not to exercise the option within the agreed period, the option expires, the landowner retains any option fee paid, and they are free to deal with the property as they wish. |
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