Read the original guidance here:
HMRC SDLT: SDLTM21620 – Example 4, Subsale of part

Understanding Subsales in Land Transactions

When dealing with land transactions under UK law, it is important to know how subsales can affect what you owe in tax. This article explains the key points about a specific scenario involving the sale and purchase of land.

Scenario Overview

Here’s a straightforward example:

– A agrees to sell some land to B for £1 million. The land includes:
– Plot 1 valued at £600,000
– Plot 2 valued at £400,000

– B then makes an agreement to sell Plot 2 to C for £400,000.

– The sales between A and B, and between B and C, occur at the same time. In this situation:
– C pays £400,000 to B
– B pays £1 million to A

Key Outcomes

From this setup, we can outline two main tax returns that need to be filed:

1. Return from B to A: B must submit a return for a transaction valued at £1 million. However, B can claim partial relief because they sold only part of the land, reducing the consideration to £600,000.

2. Return from C to B: C needs to file a return for a transaction valued at £400,000, which reflects the actual amount paid to B.

Types of Transactions

For tax purposes, these transactions fit into specific categories:

– Pre-Completion Transactions: These actions occur before the completion of a land transaction. According to the rules, they are defined in the following way:
– The transactions are included in the definition provided in paragraphs 1(1) and (2).
– The transfer from B to C is classified as a ‘free-standing transfer’ as per paragraph 2(2).

– Roles in the Transaction:
– A is the original seller.
– B is the original buyer.
– C is the new buyer acquiring Plot 2 from B.

Understanding Specific Terms

– Transferee: In this case, C is not considered to have entered into a land transaction because of the nature of the pre-completion transfer (see paragraph 3).

– Assignment of Rights: The pre-completion transaction does not fall under the usual assignments of rights, thus paragraph 9 applies here.

– Consideration for Transactions:
– C’s payment to B of £400,000 is the only relevant amount for C’s transaction.
– For B’s transaction with A, the full amount is still considered to be £1 million unless stated otherwise.

Tax Relief for Subsales

B’s transaction qualifies as a subsale under paragraph 16 of the regulations. The rules let B claim relief based on the sale to C, but this is subject to specific conditions:

– Partial Relief: Since B only sold part of the land (Plot 2), they cannot claim full relief. Instead, they can reduce their consideration from £1 million to £600,000. This reduction accounts for the value of Plot 2, which is £400,000.

– Breakdown of Consideration:
– Total consideration in the original contract: £1 million
– Value of Plot 2: £400,000
– Adjusted consideration for B’s transaction with A: £600,000

What to Remember

Here are the critical takeaways from this guidance on subsales:

– Transactions may involve multiple parties and can be intricate, affecting how returns and considerations are calculated.

– It’s essential to correctly interpret the sale amounts and claims for relief. The basis for tax consideration is crucial in determining the amount owed.

– Always check if a partial sale changes the considerations you need to report to HMRC. B can report a reduced amount due to the nature of the transaction with C.

By understanding these principles and how they interconnect, you can navigate the complex rules regarding land transactions more easily.