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HMRC SDLT: Understanding Relief for Transfers Involving Multiple Dwellings: Example 3 Explained

HMRC Guidance on Relief for Transfers Involving Multiple Dwellings: Example 3

This guidance explains the rules around tax relief for property transfers when multiple dwellings are involved. One of the principles of this relief is how the leases on properties influence whether the transfer qualifies for any relief.

Scenario Overview

In our example, a freehold reversion is being purchased. Let’s break down the details:

• A freehold reversion means the right of the owner to take back control of the property once any leases have expired.
• The property involved is a block of 20 flats.
• A 999-year headlease has been granted to a company that the tenants control. This headlease gives the tenants long-term rights to the property.
• Out of the 20 flats, ten flats are let on 99-year leases, while the remaining ten flats have leases that are for 21 years or less.

Understanding Relevant Transactions

For the tax relief to apply, specifically for transfers involving multiple dwellings, we need to determine whether a relevant transaction has taken place. A relevant transaction refers to the transfer of property that meets certain criteria to qualify for relief.

Why This Transaction is Not Relevant

In this case, the transfer of the freehold reversion does not count as a relevant transaction for the purposes of tax relief because:

• All the flats are subject to the 999-year headlease. Since this lease is for more than 21 years, it effectively means that all flats are treated under the same long-term lease agreement.
• Since the transaction involves only the reversion and not the headlease itself, it does not trigger the conditions needed for any relief.
• As a result, no relief is granted for this transaction.

What If Different Conditions Applied?

To better understand the rules, let’s see how the outcome might change if the transaction involved the headlease instead:

• If the headlease were being transferred rather than just the freehold reversion, this would qualify as a relevant transaction regarding the ten flats that are on leases of 21 years or less.
• This would open up the possibility for relief, as those flats fall under a different category due to their shorter leases. The rules are designed this way to recognise the unique nature of properties with shorter lease terms.

Key Principles to Remember

Here are the key principles to keep in mind related to relief for transfers involving multiple dwellings:

• The length of the lease is essential. Leases over 21 years often lock properties into long-term agreements, which can affect whether relief applies.
• The nature of the transaction matters. Purchasing the freehold reversion versus a headlease can lead to different tax outcomes.
• Understanding relevant transactions is crucial since the wrong assumption can lead to missed relief opportunities.

Examples for Clarity

To further clarify how these transactions work, here are some examples:

Example 1

Suppose a property investor buys a block of flats, and all the flats are on leases of less than 21 years. In this case, the transfer is likely to be considered a relevant transaction. This opportunity for relief can lead to reduced stamp duty costs for the buyer.

Example 2

Now imagine a different scenario where the buyer acquires several apartments, and each is rented under a variety of lease lengths: some for 20 years, others for 99 years. Here, the transfer would still be relevant for the flats on shorter leases, potentially allowing for tax relief. However, the flats on longer leases help to aggregate the transaction in ways that could affect overall relief eligibility.

Example 3

Returning to our main example, since all the flats in the block have that long 999-year headlease, even though there are shorter leases for half the flats, no tax relief is attainable from the transfer of the freehold reversion, as the entire block is considered under the long lease.

Who Benefits from Understanding This Guidance?

This guidance and the principles behind it are vital for several groups:

• Property investors who are purchasing blocks of flats must understand how leases work and the implications for tax relief.
• Property developers can adjust their strategies based on what types of leases are in place and their impact on costs.
• Advisors and tax professionals need to be familiar with these rules to effectively support clients in navigating their property transactions.

Final Thoughts on Transactions and Leases

It is important for anyone dealing with property transactions to fully understand how different types of leases and the specifics of those leases can affect the outcomes of their transactions. The principles laid out in this guidance serve as a foundational tool for making informed decisions in the property market.