Read the original guidance here:
HMRC SDLT: SDLTM16040 – Reliefs and Exemptions: Sale and leaseback arrangements

Reliefs and Exemptions: Sale and Leaseback Arrangements

What is a Sale and Leaseback Arrangement?

In a sale and leaseback arrangement, one party, let’s call them A, transfers a major interest in land to another party, known as B. This process involves two key transactions:

– Sale: A transfers the property to B.
– Leaseback: B then leases the property back to A.

Chargeable Consideration

Both parts of the transaction are subject to taxation under Stamp Duty Land Tax (SDLT) rules. Specifically, under section 47 of the Finance Act 2003, the chargeable amount for tax purposes is the greater of:

– The market value of what A has transferred to B.
– The consideration (payment or value) A received for this transfer.

For the leaseback to be exempt from SDLT, certain conditions must be met according to section 57A:

Conditions for Exemption

To have the leaseback component exempt from tax, five key conditions must be fulfilled:

1. The sale must include consideration, either wholly or partly, for the leaseback arrangement.
2. The interest that A leases back must be part of the original property interest A transferred.
3. The only other payment in the sale must either be cash or involve some form of debt.
4. There should be no transfer of rights under sections 45 or 45A of the Finance Act 2003 in this transaction.
5. Both A and B must be companies that are not part of the same corporate group at the time of the transaction, for group relief purposes.

Regardless of whether the leaseback is claimed for an exemption, the chargeable consideration for both transactions must be determined using the exchange rules outlined.

Determining Chargeable Consideration

The amount charged on the sale part of the deal depends on whether there was a written agreement about the leaseback at the time of the sale.

– If a leaseback agreement was in place, this must be considered when calculating the chargeable amount for the sale.
– If there wasn’t such an agreement, the chargeable consideration will reflect the full value of the property without any encumbrance.

Significantly, changes made by the Finance Act 2004 have widened the types of transactions that qualify for this relief. Leaseback arrangements made through a lease and then underlease are now included. Additionally, sale and leasebacks involving residential properties can also gain relief if they meet the necessary conditions.

There is no limit on how many sales can be involved in one leaseback. Multiple leasebacks can stem from a single sale, just as one leaseback can result from multiple sales.

For legislative references, please check:

– FA03/S57A
– FA04/S296
– FA04/SCH39/PARA16

Example Scenarios

Example 1: Converting Properties

Individual A wishes to split a freehold property into two commercial units to secure financing. To do this, A establishes Company B, which will manage the property. A transfers the freehold property to Company B and receives two long-term leases back from Company B at no payment and a minimal rent.

SDLT Implications:

– Since A and B are swapping interests, the taxable amount for each part of the transaction will be the higher of the market value of what A gains or the consideration A paid to B.
– Section 53 makes sure that the chargeable consideration for the sale is at least equal to the market value.

To determine if the conditions for exemption are met, we need to check:

– If the sale includes consideration that ensures the leaseback is exempt.
– In this case, the transfer is seen as acquiring the burdened freehold.
– The market value of the freehold is marginal, implying no SDLT charge.

If not, the leaseback would incur taxes as part of the exchange rules.

Example 2: Financing through Assignment

Company A holds a lease on a commercial property. To raise funds, it decides to assign this lease to an unrelated Company B for £1 million while securing a leaseback at the current market rent for the ground floor.

– This transaction meets the criteria of section 57A because A’s transfer is partially in exchange for the lease granted back by B.
– Since the sole other consideration here is cash, the exemption applies to the leaseback.

The assignment of the original lease to Company B will be taxed based on the greater amount of either the £1 million or its market value affected by the new lease agreement.

Example 3: Group Company Transactions

Company A transfers its leasehold interest in a commercial property to Company B, both of which are wholly owned subsidiaries of a third company, Company C. In this case, A receives £1 million plus a leaseback for the ground floor at the moment’s market rent.

– Unfortunately, section 57A does not apply here as both companies are in the same group at the transaction time.
– This means that both the assignment and leaseback will be taxed at their market values.

Depending on the situation, group relief might be available, provided the qualifying conditions are met. However, it’s important to consider the withdrawal provisions that might affect this relief.