Read the original guidance here:
HMRC SDLT: SDLT Implications of Lease Transfer Between Connected Companies: Example Analysis

Understanding SDLT in Lease Transfers: A Practical Example

In this article, we will examine a situation involving Stamp Duty Land Tax (SDLT) when an individual grants a lease to a company. We will break down the key factors to consider, whether the two parties are connected, and how the value of the transaction affects SDLT calculations.

The Scenario

Let’s look at a concrete example:

– Individual A grants a new lease for residential property to Company B.
– The consideration for this lease is a release from a debt that Individual A owes, which totals £170,000.

Key Considerations for SDLT

When assessing this transaction for SDLT purposes, there are three main questions to answer:

1. Are Individual A and Company B Connected?
2. What is the Market Value of the Property?
3. What is the Rent Payable for the Lease?

Each of these considerations can significantly affect the SDLT liability.

1. Connection Between Parties

To determine if Individual A and Company B are ‘connected,’ we refer to S1122. This legal provision defines the relationship between entities and individuals. If they are connected, it usually means that any dealings between them will have specific tax rules applied.

For example, if Individual A has control over Company B, or if they are part of the same group of companies, then they would be considered connected.

2. Market Value of the Property

The next important question is about the market value of the property being leased. The market value is essentially the price it would be expected to sell for in an open market. This value is critical because it determines the chargeable consideration when SDLT is calculated.

– If the market value is higher, the SDLT owed will be based on this amount.
– If it’s lower, you cannot claim a higher tax allowance than the actual market value.

For instance, let’s say that the market value of the property is determined to be £275,000. If it is lower, say £150,000, then the SDLT calculation would be limited to this lower figure.

3. Rent Payable

Lastly, we need to consider the rent payable for the lease. The rent can also affect the SDLT calculation. The present value of this rent, less any current threshold, will be important in determining the SDLT owed.

Calculating SDLT Based on Connection

The SDLT liability changes based on whether A and B are connected or not.

If A is Not Connected to B

If it is established that Individual A is *not* connected to Company B, the chargeable consideration for SDLT will be calculated as follows:

– The chargeable consideration will be the value of the debt released: £170,000.
– This amount is taxed at the relevant SDLT rate for residential property.
– Additionally, SDLT will also be due at the rate of 1% on the present value of the rent payable, after subtracting the current threshold.

If A is Connected to B

If Individual A is found to be connected to Company B, the calculation changes under S53. In this case, the chargeable consideration will be based on the market value of the property at the time of the transaction:

– For example, if the market value is £275,000, this is the amount on which SDLT will be calculated.
– In addition, you will still apply the 1% tax on the present value of the rent payable, again after the threshold amount is deducted.

If the market value happens to be £150,000, then the chargeable consideration is adjusted to this lower amount, and the SDLT will be calculated based on this instead of the previously higher market value.

Applying SDLT Rates

Next, let’s take a quick overview of how SDLT rates apply to the different amounts discussed.

– The rates vary depending on the amount of the chargeable consideration, and the rates are structured so that higher amounts incur higher rates.
– For example, the rates for residential properties often range from 0% up to 12%, depending on the value of the property.

Example Breakdown—When A is Not Connected to B

If A is not connected to B, and we use the earlier example that the debt released is £170,000:

– Chargeable consideration: £170,000
– Rate applicable: This might fall under the 0% to potentially 5% depending on the brackets for SDLT for residential properties.
– Tax Calculation: If it falls into a 2% band, the SDLT would be £3,400 (2% of £170,000).

If we also consider rent payable, let’s say the present value gives £30,000 and the current threshold is £12,000:

– NPV of Rent: £30,000 – £12,000 = £18,000
– 1% on NPV of Rent: £180.

Putting it together, the total SDLT would be:

– Tax on the debt: £3,400
– Tax on the rent: £180
– Total SDLT: £3,580

Example Breakdown—When A is Connected to B

Now, let’s analyze when A is connected to B, using the former example where the market value is £275,000:

– Chargeable consideration: £275,000
– Tax Rate: Depending on the SDLT rates, for example at 4%.
– Tax Calculation: If calculated at 4%, the SDLT would then equal £11,000 (4% of £275,000).

Adding rental value into the equation, assuming it still is £30,000 with the same threshold:

– NPV of Rent: £30,000 – £12,000 = £18,000
– 1% on NPV of Rent: £180.

Thus, the total SDLT for this scenario would be:

– Tax on the market value: £11,000
– Tax on the rent: £180
– Total SDLT: £11,180.

Conclusion

In this example, we observed how the connection between Individual A and Company B, the market value of the property, and the rent payable affect SDLT calculations. By following the guidelines and answering these key questions, you can establish what SDLT is due for similar transactions.