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HMRC SDLT: SDLTM28505 – Reliefs: Exercise of collective rights by tenants of flats

SDLTM28505 – Reliefs: Exercise of Collective Rights by Tenants of Flats

General Overview FA03/S74

This relief is designed for leaseholders of flats who work together to buy the freehold of their building. When leaseholders join forces to purchase the freehold of their block, they can take advantage of this tax relief.

Key Points:

– The freehold is bought as a single transaction.
– A nominee or appointee acts on behalf of the leaseholders. This could be one or more individuals or a company.
– The relief determines the amount of tax owed by splitting the total amount paid for the freehold by the number of flats owned by tenants participating in the purchase.
– The tax rate is calculated based on this portion of the total amount, making it more manageable compared to if leaseholders had purchased their shares of the freehold separately.

It is important to note that this relief cannot be claimed if the higher rate in Schedule 4A applies. For example, if the total amount paid for the freehold exceeds £500,000 and the purchaser is a company, the Stamp Duty Land Tax (SDLT) rate will be 15%.

Example

Consider a scenario where a nominee represents the leaseholders of eight out of ten flats in a block. One of these leaseholders owns two flats. If the nominee purchases the freehold of the block for £500,000, here’s how the relief works:

– The total consideration of £500,000 is divided by the number of leaseholders participating, which is eight.
– This results in a calculation of £62,500 for each flat.
– Given the amount each leaseholder is associated with falls below the threshold for tax, the appropriate tax rate is 0%, meaning no SDLT is due.

It is essential that the nominee or appointee claims this relief when filling out a land transaction return by using relief code 25.

Eligibility for Claiming the Relief

The relief can only be claimed if the effective date of the transaction is on or after 22 April 2009. Before this date, it was only available for purchases made by a specific type of company known as a statutory ‘right to enfranchise’ or RTE company. The relevant law, the Leasehold Reform, Housing and Urban Development Act 1993, has provisions for these RTE companies, but they were not activated until the date mentioned above.

Important Considerations

– The relief is applicable only when leaseholders collectively act to buy the freehold.
– The transaction must involve the proper calculation of consideration based on the number of flats owned by participating tenants.
– The relief has specific eligibility criteria with a clear effective date for transactions.

How to Claim the Relief

Leaseholders should follow these steps to ensure they successfully claim the relief:

1. Identify if your leaseholders are part of a collective group looking to purchase the freehold.
2. Ensure that the leaseholders are acting together and that the nominee or appointee is properly appointed to represent the group.
3. Calculate the total consideration paid and divide it by the number of participating flats.
4. Complete the land transaction return and use relief code 25 to claim the relief.

It is beneficial for leaseholders to retain documentation proving their collective effort in the purchase. This might include agreements among leaseholders, evidence of participation, and any correspondence with the nominee or appointed company.

Additional Points On Higher Rate SDLT

If leaseholders are uncertain whether the higher rate applies, here are some key conditions:

– If the total consideration for buying the freehold exceeds £500,000, and the buyer is a company, the SDLT rate becomes a flat 15%.
– This higher rate applies even if individual leaseholders involved in the purchase may not reach that threshold separately.

Being aware of these conditions helps leaseholders understand their tax obligations when purchasing a freehold collectively.

Conclusion

This relief encourages leaseholders to work together in obtaining their freehold, making it a more economical choice through reduced tax liability. By understanding how the relief works, eligible leaseholders can save significantly on tax when purchasing the freehold of their flats.