Read the original guidance here:
HMRC SDLT: SDLTM28005 – Reliefs: Alternative property finance

Stamp Duty Land Tax Reliefs for Alternative Property Finance

Overview of Reliefs

The government provides relief from stamp duty land tax (SDLT) for certain types of alternative property finance schemes. This guidance covers three main types of schemes, with one having two different variations. The purpose of these reliefs is to ensure the stamp duty land tax that is applied is comparable to what would be paid if the property were bought through a standard mortgage.

It is important to claim these reliefs correctly by completing a land transaction return. This return should include a claim for the relief, along with the agreed purchase price between parties involved in the transaction.

Types of Alternative Property Finance

1. Land purchased by a financial institution and leased to a person
– In this arrangement, a person agrees with a financial institution where the institution buys a property or a share of the property. This share is held in trust, meaning the institution and the person share beneficial ownership.
– The financial institution then grants the person a long lease. This lease will often include an option for the individual to eventually take ownership of the property.
– Throughout the lease, the person makes regular payments. At the end of the lease term, the individual has the right to take full ownership of the property.
– The beneficial ownership can be transferred to the tenant at any point during the lease, while retaining the right to take ownership at the end of the lease. For more information, see SDLTM28100.

2. Land purchased by a financial institution and re-sold to a person
– Here, the financial institution buys a property and then sells it directly to the individual. In this case, the person grants the financial institution a legal mortgage as part of the transaction.
– This arrangement enables the individual to become the owner of the property while incorporating a legal mortgage agreement with the financial institution. Further details can be found in SDLTM28400.

Key Terms Defined

To understand how these alternative financing schemes work, it’s essential to define some key terms:

– Financial Institution: According to section 73BA of the Finance Act 2003, the term ‘financial institution’ refers to specific types of organizations that can provide these financing options.

– Legal Mortgage:
– For land in England: This refers to a legal mortgage as outlined in section 205(1)(xvi) of the Law of Property Act 1925.
– For land in Northern Ireland: A legal mortgage can involve a conveyance of a legal estate or an agreement by demise or sub-demise, as well as a charge by way of legal mortgage.

Claiming the Relief

When you want to claim the SDLT relief available for alternative property finance, you must complete a land transaction return. This form must declare:
– The measure of relief you are requesting.
– The chargeable consideration, which is the price that has been agreed on between you and the other party in the transaction.

This process ensures that you receive the proper relief and are not paying more tax than necessary.

Understanding Charging Consideration

Charging consideration refers to the amount on which stamp duty land tax is based. In alternative property finance scenarios, it’s important to note that this amount is typically set to reflect the agreed price between the parties involved.

The approach ensures uniformity so that when tax relief is applied, it accurately represents the value of the arrangement, similar to traditional purchase methods.

Examples in Practice

Let’s clarify with additional examples to illustrate the application of these reliefs:

1. Example of a Long Lease Agreement:
– Jane enters into a financing arrangement with ABC Financial Institution.
– ABC buys a house valued at £250,000 and grants Jane a long lease.
– She pays a monthly rent over ten years, after which she can buy the property outright for a nominal fee.
– When filing her land transaction return, Jane states that her chargeable consideration for SDLT is £250,000, the same as if she had purchased it outright.

2. Example of Property Re-sale:
– Mark wants to buy a property worth £300,000.
– The institution buys the property for Mark and sells it to him using a legal mortgage.
– Mark agrees to pay back the mortgage over a set period while making agreed monthly payments.
– For his tax return, Mark reports £300,000 as the chargeable consideration, ensuring he is treated as if he used a standard mortgage.

Maintaining Ownership Rights

It is also essential to understand ownership rights when engaging in these alternative financing options. In the examples provided, both Jane and Mark retain significant rights, which protect their interests throughout the leasing or mortgage term.

– They can exercise the right to transfer beneficial ownership or obtain legal possession of the property in accordance with their agreements, offering a level of security similar to traditional ownership routes.

Final Notes on Procedure

When entering into these alternative financing arrangements, it is suggested that individuals keep thorough records and documentation. This preparation will help simplify the relief application process and can protect against potential issues that may arise with tax compliance or future property disputes.

– Always consult with qualified professionals or financial advisors if in doubt regarding the proper completion of tax forms or understanding your responsibilities under these alternative arrangements.

By adhering to these guidelines and understanding the principles set out in the HMRC regulations, you can make informed decisions when using alternative property finance options while ensuring compliance with stamp duty land tax obligations.