HMRC SDLT: SDLTM33790 – Chargeable consideration includes rent – Para19
Principles and Concepts of Chargeable Consideration Including Rent
This section of the HMRC internal manual details the inclusion of rent as chargeable consideration under SDLT (Stamp Duty Land Tax) regulations. It provides guidance on how rent is assessed and calculated for tax purposes.
- Explains the definition and scope of chargeable consideration.
- Details the inclusion of rent in SDLT calculations.
- Outlines the legal framework and relevant paragraphs, such as Para19.
- Provides examples and scenarios for better understanding.
Read the original guidance here:
HMRC SDLT: SDLTM33790 – Chargeable consideration includes rent – Para19
Understanding Chargeable Consideration and Rent in Property Transfers
This guidance covers how rent is treated as part of chargeable consideration when a property interest is transferred from a partnership. It explains what you need to consider regarding leases and provides information on calculating values under relevant laws.
What is Chargeable Consideration?
Chargeable consideration is the total amount paid or value received for a property transfer. In this context, chargeable consideration can include:
- Money paid upfront (also known as a premium).
- Future payments such as rent.
When Does This Apply?
The rules discussed apply when:
- A partnership is involved in the transfer.
- The whole or part of the payment for the transfer consists of rent.
Leases and Their Considerations
When a lease is created, the guidelines for calculating what is considered chargeable information are based on different parts of the Finance Act 2003 (FA03).
Key Rules for Leases
1. Premiums:
– The consideration for any premium relates to the rules found in FA03, Schedule 4.
2. Rent:
– The consideration for any rent agrees with the guidelines in FA03, Schedule 5.
FA03, Schedule 5 specifically defines how to calculate the net present value of expected future rent payments. Net present value is a way to assess the future cash flows from rent in today’s terms, which helps in fair valuation during the property transfer.
Special Partnership Rules
If the special partnership rules outlined in Part 3 of FA03 are relevant to a transaction, they change how the rent is valued as part of the chargeable consideration.
Calculating Chargeable Consideration Under Special Rules
When the special partnership rules apply, the calculated chargeable consideration will comprise:
– A percentage of the market value of the premium.
– A percentage of the net present value of the rent.
The net present value of rent is assessed under the criteria in FA03, Schedule 5, but modified slightly by paragraph 19(2) of the guidelines.
Determining the Proportion of Net Present Value
The proportion of the net present value that is taxable is calculated using the formula: (100 – SLP) %.
- SLP is the sum of the lower portions calculated according to paragraph 20.
- The partnership’s share is established based on the instructions in paragraph 21.
Additional Information
If you need more details about how to calculate the sum of lower portions, please refer to SDLTM33750.
Understanding these calculations can be complex, and it is important to follow them carefully to ensure all charges are accurately calculated during the transfer process.
Practical Example
Let’s consider a simplified example to illustrate this process:
- A partnership owns a commercial building and decides to lease a part of it to a third party.
- The market value of the premium for the lease is £100,000.
- The expected annual rent is £20,000.
- If the calculations based on various parameters result in an SLP of 20, the chargeable consideration comprises:
1. Market Value of the Premium:
– 20% of £100,000 = £20,000
2. Net Present Value of Rent:
– The net present value is calculated using FA03, Schedule 5, yielding a certain value based on expected future cash flows. Assuming here it calculates to £60,000.
3. Chargeable Consideration:
– Percentage chargeable: (100 – 20)% = 80%
– 80% of £60,000 = £48,000
In total, the chargeable consideration in this example would amount to £68,000 (£20,000 + £48,000).
Important Considerations
When looking at chargeable consideration that includes rent, it’s important to remember that:
- All calculations need precise input values to avoid penalties and ensure compliance.
- Consulting with a tax adviser or accountant for complicated transactions can be beneficial.
- Total chargeable consideration can impact any potential tax liabilities upon the transfer of interest in the property.
By understanding and applying these guidelines, partnerships can navigate property transfers more effectively, ensuring compliance with tax regulations, while also maximising financial outcomes.