HMRC SDLT: SDLTM27050 – Reliefs: Right to buy transactions, shared ownership leases etc: Market value election for leasehold property where additional shares may be purchased: detailed conditions FA03/SCH9/PARA4

Market Value Election for Leasehold Property

This section of the HMRC internal manual details the conditions under which a market value election can be made for leasehold properties where additional shares may be purchased. It outlines specific reliefs for right to buy transactions and shared ownership leases.

  • Explains the market value election process for leasehold properties.
  • Details conditions under FA03/SCH9/PARA4.
  • Focuses on right to buy transactions and shared ownership leases.
  • Provides guidance on additional share purchases.

Understanding Market Value Election for Shared Ownership Leases

This guidance explains the market value election for shared ownership leases where additional shares can be purchased, often referred to as ‘staircasing.’ This election is relevant when the freehold property is not available.

Basic Conditions for Lease Eligibility

Before delving into the specifics, it’s important to know that these leases must satisfy the general conditions highlighted in SDLTM27020. Additionally, they need to meet a set of specific conditions detailed below.

Key Requirements for the Lease

1. Right to Alter Lease Terms:
– The lease must allow the lessee (the tenant) to request changes to the lease terms.
– This change must include the option for the lessee to pay a specific sum to reduce the rent payable under the lease.

2. Structure of Rent and Premium:
– The lease should be composed of two parts:
– A payment made in the form of rent,
– A premium that calculates the payment based on:
– The premium obtainable on the open market for a lease with the same terms. However, in this case, the minimum rent replaces the actual rent charged under the lease, or
– A sum calculated based on that premium.

3. Details of Minimum Rent and Premium:
– The lease must explicitly state:
– The minimum rent amount, and
– The premium value that can be obtained on the open market, or
– The associated sum calculated from that premium.

Lessee’s Election for Tax Calculation

The lessee (tenant) must formally elect to have the stamp duty land tax (SDLT) calculated based on FA03/SCH9/PARA4. This includes the minimum rent and the premium, or the alternative sum indicated in the lease.

How to Make the Election

The election process occurs within the land transaction return associated with the lease grant. The following steps outline how to make this election:

– Indicate the market value as the consideration in the land transaction return.
– Alternatively, if the return has already been filed, lessees can amend it to reflect the market value as consideration.
– It’s important to note that if a lessee chooses to amend the return, it must be completed within 12 months of the original filing date.

Irrevocability of the Election

Once the lessee makes the market value election, it is irrevocable. This means that, after making the election, the lessee cannot alter it, not even by further amendments to the original return.

Additional Examples and Illustrations

To clarify the above points, here are some illustrative examples.

– Example of Rights in the Lease:
Consider a shared ownership lease where the tenant decides to reduce their rent. The lease allows this adjustment. The tenant pays a specified sum for this change, thus qualifying under the necessary conditions.

– Example of Structure of Rent and Premium:
A lease might state that the annual rent is £500, but there’s also a premium calculated based on an open market rate. If similar properties have a market premium of £2,000 when minimum rent is considered, this structure meets the required conditions.

– Example of Election Process:
If a lessee files a land transaction return that shows the initial market value of the lease as £150,000, they can, within the first year, amend the return to reflect this amount conclusively, ensuring all tax implications are aligned with their election.

– Impact of Irrevocability:
Once the lessee has declared their choice for SDLT to be calculated under this market value, they must be certain of their decision as they cannot change it later, reinforcing the need for clear understanding before proceeding.

Final Notes on Compliance and Importance

It is vital for lessees to fully understand their options and the implications of each decision made regarding their lease and tax standings. The SDLT provisions are designed to ensure fair taxation where property transactions occur. Thus, clarity on the lease terms, proper election procedures, and awareness of irrevocability are all essential components that each lessee must adhere to.

This understanding will also help avoid potential complications or disputes with HMRC regarding the tax owed on shared ownership leases.

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Written by Land Tax Expert Nick Garner.
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