HMRC SDLT: SDLTM00320 – Scope: What is chargeable: Land transactions: Exempt interests FA03/S48(2)

Principles and Concepts of Exempt Interests in Land Transactions

This section of the HMRC internal manual discusses the scope of chargeable land transactions, specifically focusing on exempt interests as outlined in FA03/S48(2). It provides guidance on what constitutes exempt interests and how they are treated under the legislation.

• Defines exempt interests in land transactions.
• Explains the legal framework under FA03/S48(2).
• Clarifies the scope of chargeable transactions.
• Provides guidance for HMRC staff on applying these rules.

Understanding Exempt Interests in Land Transactions and SDLT

In the context of land transactions, certain types of interests are known as ‘exempt interests’. These interests are not subject to Stamp Duty Land Tax (SDLT), meaning that if you are involved in a transaction that includes one of these interests, you do not have to pay SDLT on it.

What are Exempt Interests?

Exempt interests are specific rights or interests in land that do not incur SDLT. Below is a list of the main types of exempt interests:

• Security Interest: This type of interest is held to secure the payment of money or to ensure that other obligations are met. The most common example of a security interest is a mortgage. In a mortgage, the borrower provides the property as security for a loan.
• Licence to Use or Occupy Land: A licence allows someone to use or occupy land without granting them exclusive possession. It’s important to note that documents labelled as licences can sometimes function more like leases. This is particularly true if the arrangement allows the tenant sole occupation of the property.
• Tenancy at Will: A tenancy at will grants someone the right to occupy land but can easily be terminated by either party. However, be aware that what might be called a ‘tenancy at will’ could actually be another form of tenancy, like a periodic tenancy, especially if rent is exchanged regularly.
• Advowson: An advowson is a unique right that grants its holder the authority to present a clergyman to a church office, like a rector or vicar. This right indicates a long-standing connection to a religious institution.
• Franchise Granted by the Crown: Certain rights granted directly by the Crown can qualify as exempt interests. These may include privileges such as the right to hold a market or collect tolls.
• Manor: The concept of a manor can also represent an exempt interest. This includes the rights associated with the lordship of a manor, but it’s good to note that owning a manor might also involve chargeable interests, such as profits a prendre (the right to take something from the land, like timber or minerals).

Details on Each Exempt Interest

1. Security Interest

A security interest is primarily used to back a financial obligation. For example, when someone takes out a mortgage on a home, the property serves as collateral for the loan. If the borrower fails to repay the loan, the lender can reclaim the property through legal means.

2. Licence to Use or Occupy Land

A licence permits someone to use a property without giving them the same rights as a lease. An example could be a short-term agreement to rent a room or space without formal lease terms, allowing the owner to maintain control and terminate the arrangement at any time. But be cautious; if a licence effectively grants exclusive possession, it may be treated as a lease.

3. Tenancy at Will

A tenancy at will is a flexible arrangement where either party can end the tenancy at any time. It doesn’t require a formal agreement and can be ideal for short-term needs. Nonetheless, if payments are made regularly, it may be classified under a different type of tenancy, such as a monthly or weekly tenancy.

4. Advowson

Holding an advowson means having the right to recommend someone for a church position. For example, if a church requires a new vicar, the person who holds the advowson can appoint a suitable candidate, typically chosen from a pool of candidates deemed fit for leadership within the church’s community.

5. Franchise Granted by the Crown

Franchises that are conferred by the Crown might include special economic rights. For instance, a franchise may allow an individual or organisation to set up a market in a particular area or to collect tolls on a specific road or bridge. These privileges are typically granted to stimulate local commerce or manage public spaces.

6. Manor

A manor comprises various rights related to land ownership, including agricultural and commercial privileges. The lord of the manor can have exclusive rights over a parcel of land. However, this position can also come with chargeable interests, meaning that some aspects of the land’s use may still incur SDLT costs.

Recognising Exempt Interests in Practice

Being aware of these exempt interests is important for individuals and businesses engaged in land transactions. If you are purchasing or transferring property, knowing which parts of your deal may be exempt from SDLT can save you significant money. Here are some examples of how this knowledge can be applied:

• Buying a Property with a Mortgage: If you are buying a property and you have a mortgage on it, the mortgage is a security interest and will not attract SDLT.
• Licences vs. Leases: If you need temporary access to a property, negotiating a licence instead of a lease could exempt you from SDLT implications. However, ensure that the arrangement does not grant you exclusive possession, or it could be deemed a lease.
• Ending a Tenancy: If you are in a tenancy at will and need to leave the property quickly, knowing that your agreement can be terminated easily is beneficial. Furthermore, this arrangement doesn’t incur SDLT costs.
• Using an Advowson: If you have an advowson, this unique right does not attract SDLT, allowing you to present candidates for church offices without additional tax worries.
• Operating under a Franchise: If you acquire a franchise from the Crown to operate a market, your franchise is exempt from SDLT. This allows you to conduct your business without incurring additional tax liabilities.
• Evaluating Manor Rights: If you are involved with the management of a manor, be mindful of the potentially chargeable interests but recognise that the lordship itself may not be subject to SDLT.

Final Thoughts on Exempt Interests

Understanding exempt interests is essential for anyone involved in land transactions. Recognising the various types of interests and how they are treated regarding SDLT can lead to more informed decisions, potentially reducing tax liabilities. Each type of interest serves a distinct purpose and understanding these distinctions can help you navigate the complexities of property ownership and transactions effectively.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM00320 – Scope: What is chargeable: Land transactions: Exempt interests FA03/S48(2)

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