HMRC SDLT: SDLTM08150 – Scope: When is Stamp Duty Land Tax (SDLT) chargeable: Contracts and substantial performance: Conditional contracts

Principles and Concepts of SDLT Chargeability

This section of the HMRC internal manual explains when Stamp Duty Land Tax (SDLT) is chargeable, focusing on contracts and substantial performance, particularly conditional contracts.

• SDLT is chargeable upon substantial performance of a contract.
• Conditional contracts may delay SDLT chargeability until conditions are met.
• Substantial performance includes taking possession or paying a substantial amount.
• Understanding these principles helps in determining SDLT obligations accurately.

Stamp Duty Land Tax (SDLT) and Conditional Contracts

When dealing with Stamp Duty Land Tax (SDLT), it’s important to understand when it applies, especially in the context of conditional contracts. This guidance explains the concept of conditional contracts, substantial performance, and how they relate to SDLT.

What is a Conditional Contract?

A conditional contract is an agreement that takes effect only when certain criteria are met. This means that the contract is not fully enforceable until specific conditions are satisfied. For example:

• If a buyer agrees to purchase a property on the condition they secure financing, the contract only becomes valid once they get that loan.
• Another example could be a contract for purchasing a property, contingent on the seller receiving planning permission for a new development.

Substantial Performance and SDLT

SDLT applies to property transactions, including those governed by conditional contracts if they are substantially performed. But what does substantial performance mean in this context?

Substantial performance refers to situations where the contract has been carried out to a degree that the main objective has been achieved, even if all the conditions have not been fully met.

When is SDLT Chargeable?

According to HM Revenue and Customs (HMRC), SDLT becomes chargeable when a transaction is substantially performed. Therefore, if a buyer has taken possession of the property or significant actions have been taken toward fulfilling the contract, SDLT can be applied despite it being conditional.

Examples of Substantial Performance

Here are a couple of scenarios that illustrate substantial performance:

• If a buyer has made an initial payment, and the seller has transferred the property title, even if the final agreement has conditions to be met, SDLT will still apply because substantial performance has occurred.
• Similarly, if construction on a new property begins based on the conditional contract, and certain conditions are being met throughout the development phase, SDLT would apply as the project moves forward.

Factors to Consider in Assessing Substantial Performance

Determining whether a transaction has met substantial performance involves looking at various factors:

• Nature of Conditions: The specific conditions tied to the contract will impact when SDLT applies. If the buyer has occupied the property or the seller has begun the transfer process, it indicates substantial performance.
• Extent of Work Done: If extensive work is undertaken and key elements of the contract are fulfilled, this leans towards substantial performance. For example, if renovations start and the buyer has paid for significant work, SDLT will likely apply.
• Timing of Performance: The timing when these actions are taken is also relevant. If actions signaling substantial performance take place before all conditions are met, SDLT may be due.

Judging Cases on Individual Merits

Every situation involving conditional contracts and SDLT must be evaluated individually. There are no one-size-fits-all guidelines, so consideration of the details surrounding each contract is essential.

For instance, in one case, a buyer might begin making payments and has already moved in, which can be seen as substantial performance. In contrast, another buyer may only have signed a contract with no further action taken, which would not trigger SDLT.

Example Scenario: Conditional Contract in Action

Let’s consider a detailed example to clarify how SDLT interacts with conditional contracts:

• Imagine a buyer who signs a conditional contract to purchase a house, with the stipulation that they must sell their current property first. The buyer begins home renovations and gets a property valuation while waiting for their current home to sell. In this case:
• If the buyer engages in activities that demonstrate they are moving forward with the new property (like applying for a mortgage or starting work on the new property), SDLT may apply despite the pending sale of their existing home.
• On the other hand, if the buyer does not take any further action or secure a mortgage, then SDLT will likely not apply until the conditions are met.

Understanding SDLT Liability in Conditional Contracts

When working with conditional contracts, it’s important to understand the implications of SDLT from a financial standpoint:

• Liability Timing: If SDLT applies due to substantial performance, the buyer must be prepared to pay the tax, even if some conditions of the contract remain unfulfilled.
• Financial Planning: Buyers should factor in SDLT payments in their financial planning, as they may need to cover this tax even if the full purchase is not completed.

Important Considerations for Buyers and Sellers

Buyers and sellers entering conditional contracts should keep the following in mind:

• Legal Advice: It is advisable to seek legal counsel when entering these contracts to understand the implications for SDLT and other tax liabilities.
• Document Actions: Keeping thorough records of actions taken under the contract can help clarify whether substantial performance has occurred, thus influencing SDLT obligations.
• Be Aware of Changes: Regulatory changes may affect how SDLT applies to conditional contracts. Staying informed is crucial.

Conclusion: The Importance of Understanding Conditional Contracts and SDLT

Understanding the relationship between conditional contracts and SDLT is key for both buyers and sellers in real estate transactions. By recognising the rules that govern substantial performance and SDLT obligations, parties can better manage their legal and financial responsibilities.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM08150 – Scope: When is Stamp Duty Land Tax (SDLT) chargeable: Contracts and substantial performance: Conditional contracts

View all HMRC SDLT Guidance Pages Here