HMRC SDLT: SDLTM07950 – Scope: When is Stamp Duty Land Tax (SDLT) chargeable: Contracts and substantial performance: Substantial amount of the consideration FA03/S44(5)(b)

Principles of Stamp Duty Land Tax (SDLT) Chargeability

This page from HM Revenue & Customs explains when Stamp Duty Land Tax (SDLT) is chargeable, focusing on contracts and substantial performance under FA03/S44(5)(b).

SDLT becomes chargeable when a substantial amount of consideration is paid.
Substantial performance occurs when the buyer takes possession or pays a significant portion of the purchase price.
Understanding these principles helps in determining the timing of SDLT liability.

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Read the original guidance here:
HMRC SDLT: SDLTM07950 – Scope: When is Stamp Duty Land Tax (SDLT) chargeable: Contracts and substantial performance: Substantial amount of the consideration FA03/S44(5)(b)

Understanding When Stamp Duty Land Tax (SDLT) is Chargeable

What is Substantial Performance?

A contract is considered to be substantially performed before final completion if the buyer has paid a significant portion of the total money stated in the contract.

Determining the Amount Paid

When figuring out if a substantial amount of the money has been paid or provided, it’s important to look at whether any of the money being discussed is rent. The rules are as follows:

– If none of the money is rent: The contract is substantially performed when almost all (or all) of the total payment is completed.

– If rent is the only payment: The contract is substantially performed when the first rent payment is made.

– If there are both rent and other payments: The contract is substantially performed when either:
– Almost all (or all) of the payment that is not rent is completed.
– The first rent payment is made.

The event that happens first will trigger the SDLT charge.

What Does “Substantially the Whole” Mean?

“Substantially the whole” refers to a payment that is 90% or more of the total sum that must be paid under the contract. However, if the specific situation indicates that practically all of the payment has been made, this definition might change.

Example Scenario

Consider a scenario where a property has a market value of £10 million. The contract for this property states the buyer will pay £15 million, with £10 million due immediately and the remaining balance to be paid after 99 years. In this case, because £10 million has been paid right away, one might argue that substantially all of the consideration has been provided.

Key Principles of SDLT Chargeability

1. Nature of Consideration: It’s essential to understand what constitutes the ‘consideration’ in the contract, whether it’s just rent, a lump sum payment, or a combination.

2. Timing of Payments: The timing of when payments are made significantly affects when SDLT becomes chargeable.

3. Percentage Threshold: The 90% rule plays a key role in establishing when a contract is considered substantially performed.

4. Complex Transactions: In complex agreements where payments are staggered over time, it’s vital to regularly assess at which point the SDLT charge would apply.

Understanding Financial Terms

– Consideration: This is the total amount of money that is exchanged in a contract. It includes both cash payments and other forms of value (like rent).

– Completion: This is the point at which the property transfer is finalised, and the buyer officially becomes the owner.

Implications for Buyers

– If you’re buying property, be mindful of when you make payments. Knowing when a contract reaches substantial performance could affect when you owe SDLT.

– Ensure clarity in your agreements about what counts as consideration to avoid misunderstandings during the buying process.

Examples of Different Payment Scenarios

– Example 1: Only cash payment
– A buyer agrees to pay £1 million for a property and makes a payment of £900,000. In this case, the buyer has substantially performed the contract as they have paid more than 90% of the total amount.

– Example 2: Only rent payment
– A buyer is entering a rental agreement and pays the first month’s rent of £1,500. This is when the contract is substantially performed as the first payment of rent has been made.

– Example 3: Mixed payment types
– A buyer agrees to pay £500,000 for a property and also agrees to pay £5,000 monthly rent. The buyer pays £490,000 of the purchase price. At this stage, the contract is nearly performed since the majority of the purchase price (98%) has been paid. SDLT can be determined as chargeable.

Exceptions and Special Cases

Certain agreements or arrangements may have unique circumstances that alter when SDLT is chargeable. It’s always wise to consult with a professional who can provide tailored advice based on individual situations.

– Long-term contracts: For contracts that involve delayed payments over many years, it can be complicated to establish when payment has been substantially performed.

– Substantial improvements: If alterations or improvements are made to a property, it may impact the valuation and thus the SDLT charge.

Legal References for More Information

For a detailed understanding of the legal foundations and additional examples, you can refer to the official HMRC guidance, such as SDLTM0000 and others available on the HMRC website.

Seeking Professional Advice

Given the complexities associated with property transactions and SDLT, it’s advisable for buyers to seek assistance from legal or financial professionals. They can help interpret contract clauses and provide advice on SDLT implications, ensuring compliance with regulations.

Final Thoughts

Being aware of when SDLT is charged and understanding substantial performance leads to informed decision-making during property purchases. Knowing the financial commitments and obligations helps buyers navigate the property market with greater confidence.