Read the original guidance here:
HMRC SDLT: SDLTM27040 – Reliefs: Right to buy transactions, shared ownership leases etc: Shared ownership leases: market value election where freehold reversion is available: treatment of freehold reversion FA03/SCH9/PARA3

Understanding Shared Ownership Leases and Market Value Elections

Introduction

This article explains specific rules around shared ownership leases, particularly focusing on how the election to determine market value affects the treatment of freehold reversion.

Key Terms to Know

Before we dive into the details, it’s important to understand some key terms:
– Shared Ownership Lease: A type of ownership where you buy a share in a property and pay rent on the remaining share.
– Reversion: The interest that returns to the freeholder after a lease ends.
– Market Value Election: A formal decision to use the market value of a property for tax purposes.

Making a Valid Election

Under the rules set out in FA03/SCH9/PARA2, if a valid election is appropriately made, the situation becomes more straightforward for those involved in shared ownership leases.

– Conditions for Exemption:
– A valid election must be made.
– Any applicable stamp duty land tax (SDLT) must be paid upfront.

When these conditions are met, the transfer of the reversion under the lease agreement is exempt from SDLT charges.

Understanding Reversionary Interest

Although the transfer of reversionary interest to the leaseholder is technically a transfer of a chargeable interest, it is exempt from SDLT charges as per FA03/SCH9/PARA3. This means:

– No SDLT is due on the reversion transfer.
– This exemption applies whether or not payment (consideration) is made for the reversion.

Importance of Notification

Even if the SDLT is not applicable, the transfer still requires notification:

– A Land Transaction Return must be submitted.
– This emphasizes that while no tax is owed, the transfer’s details still need to be documented officially.

Initial Shared Ownership Transaction

In cases where no SDLT is due on the initial shared ownership transaction because the market value is below the 0% SDLT threshold, the lessee must still take action.

– The lessee needs to make an election under FA03/SCH9/PARA2.
– This ensures that the later transfer of the reversion does not incur charges.

Examples for Better Understanding

Consider the following examples to illustrate the points more clearly:

– Example 1: Successful Market Value Election
Sarah purchases a 50% stake in a shared ownership property valued at £200,000. Since her share falls below the SDLT threshold, she pays no tax. However, she makes a formal election under FA03/SCH9/PARA2. Later, when she decides to take over the remaining 50%, the transfer of the reversion is exempt from SDLT because she has followed the necessary procedures.

– Example 2: Failure to Make an Election
Tom buys into a shared ownership scheme similar to Sarah’s but forgets to make the election under FA03/SCH9/PARA2. Later on, when he takes over the remaining share of the property, his initial failure to elect means the transfer is now chargeable, and Tom would face SDLT costs.

Final Points Regarding the Process

Understanding the procedures around shared ownership leases is essential for avoiding unnecessary tax liabilities.

Make sure to adhere to all requirements:
– Ensure that a market value election is made as required.
– Always submit a Land Transaction Return when transferring interests, even if no SDLT is owed.

This process is advisable to safeguard against future complications regarding tax obligations.

Additional Resources

Individuals seeking further guidance can visit the HMRC website or consult a qualified tax adviser for more information specific to their circumstances.

For more detailed information on SDLT and its application, including related guidance, please refer to resources available online, such as SDLTM27040 – Reliefs: Right to buy transactions, shared ownership leases etc..