Can a charity claim SDLT relief when it buys a property and leases it to its trading subsidiary?

Introduction

Charities often ask whether Stamp Duty Land Tax (SDLT) relief is available when they buy property for a project that will be operated through a separate trading company. This is a common issue where a charity wants to keep ownership of the property but lease it to its wholly owned subsidiary.

The key question is whether the property is being held for “qualifying charitable purposes” under the SDLT rules. That can include direct charitable use, but it can also include holding a property as an investment if the profits are applied to the charity’s own charitable purposes.

The Question

A registered charity plans to buy a new-build residential property. The intention is for the charity to own the property and lease it to its trading subsidiary, which will operate a children’s home from the premises. The charity wants to know whether SDLT charities relief can still apply if the property is treated as an investment and the subsidiary donates its profits back to the charity.

A further concern is whether the subsidiary can temporarily retain profits during the year before making those payments to the charity, or whether that would put the SDLT relief at risk.

Nick’s Explanation

Nick’s view was that leasing the property to a trading subsidiary is more likely to be treated as an investment arrangement than as direct charitable use by the charity itself. That does not automatically prevent relief.

In anonymised form, his reasoning was:

“Investment holdings can still qualify for SDLT relief under Finance Act 2003, Schedule 8, Paragraph 1(3A)(b) if the profits are applied to the charitable purposes of the charity.”

He also explained that the main risk is where profits are kept indefinitely or used for non-charitable purposes. By contrast, where the trading subsidiary has a clear and consistent policy of donating its profits to the parent charity for charitable purposes, that structure is capable of fitting within the legislation.

On the practical point about timing, Nick explained that short-term retention of profits is not necessarily fatal. What matters is whether the overall arrangement shows that profits are in fact being applied to the charity’s charitable purposes, rather than being accumulated for some other use.

He also highlighted the clawback risk. If within three years the property is used or held otherwise than for qualifying charitable purposes, SDLT relief may be withdrawn.

The Law

The relevant rules are in Finance Act 2003, Schedule 8.

Under Schedule 8, charities relief can apply where land is acquired by a charity and the property is held for qualifying charitable purposes.

Finance Act 2003, Schedule 8, Paragraph 1(3A) provides:

“For the purposes of this Schedule, a charity (‘C’) holds a chargeable interest for qualifying charitable purposes if it holds it—
(a) for use in furtherance of the charitable purposes of C or another charity, or
(b) as an investment from which the profits are applied to the charitable purposes of C.”

This means there are two possible routes:

• direct use in furtherance of charitable purposes; or
• holding the property as an investment, with profits applied to the charity’s charitable purposes.

There is also an anti-avoidance and clawback rule. Finance Act 2003, Schedule 8, Paragraph 2(3) states:

“For the purposes of this paragraph, a ‘disqualifying event’ means—
(a) the purchaser ceasing to be established for charitable purposes only, or
(b) the subject-matter of the transaction, or any interest or right derived from it, being used or held by the purchaser otherwise than for qualifying charitable purposes.”

If a disqualifying event occurs within three years of the effective date of the transaction, the relief can be withdrawn and SDLT can become payable.

HMRC’s guidance at SDLTM26010 also recognises that charities relief can apply where property is acquired as an investment and the profits are applied to the charity’s charitable purposes.

Analysis

The starting point is to identify who is buying the property. If the buyer is the charity, the charity may claim charities relief if the statutory conditions are met.

The next question is how the property will be held after purchase.

If the charity itself directly uses the property in carrying out its charitable work, the case for relief is usually more straightforward under Paragraph 1(3A)(a).

Where, however, the charity leases the property to its trading subsidiary, the position is different. The subsidiary is a separate legal person and is not itself a charity. That makes it harder to say the charity is directly using the property for its own charitable purposes. In most cases, the better analysis is that the charity is holding the property as an investment.

That is not a problem in itself, because Paragraph 1(3A)(b) expressly allows relief where the property is held “as an investment from which the profits are applied to the charitable purposes” of the charity.

The critical issue is therefore what happens to the profits generated by the arrangement.

• If the rental or other profits arising from the property are ultimately applied to the charity’s charitable purposes, the statutory wording may be satisfied.
• If the trading subsidiary retains profits indefinitely, builds up reserves for non-charitable reasons, or uses profits for activities not directed to the parent charity’s charitable purposes, relief becomes more vulnerable.

In many charity structures, a trading subsidiary donates its taxable profits to the parent charity under Gift Aid. Where that happens regularly and consistently, and the profits are actually applied for the charity’s charitable purposes, that supports the argument that the property is being held as an investment within Paragraph 1(3A)(b).

The question about temporary profit retention is important. In real business operations, a company will often hold profits for a period before year end, before preparing accounts, or before making a distribution. A short delay of that kind is not the same as retaining profits for non-charitable use. The legal and practical focus is on the substance of the arrangement:

• Is there a clear intention that profits are to be passed to the charity?
• Is there a regular pattern of doing so?
• Are the profits actually applied to the charity’s charitable purposes?

If the answer to those questions is yes, the structure is more likely to fit the legislation.

The three-year clawback rule must still be kept in mind. Even if relief is claimed correctly at the outset, a later disqualifying event can trigger SDLT. The charity should therefore ensure that the property continues to be held in a way that falls within the statutory definition of qualifying charitable purposes throughout the relevant period.

This issue is different from “uninhabitable” or “not suitable for use” arguments sometimes raised in residential SDLT cases. In those cases, the threshold is now relatively high following Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799. That authority underlines that SDLT reliefs and exceptions are interpreted by close reference to the statutory test. In the charity context, the same practical lesson applies: the actual facts and the statutory wording matter more than labels attached to the arrangement.

Outcome

A charity can potentially claim SDLT charities relief when it buys a property and leases it to its trading subsidiary, but only if the arrangement fits the investment limb in Finance Act 2003, Schedule 8, Paragraph 1(3A)(b).

In practical terms, that means:

• the property is being held as an investment by the charity; and
• the profits from that investment are applied to the charity’s charitable purposes.

Regular donation of the subsidiary’s profits to the charity can support relief. Temporary retention of profits for ordinary accounting or operational reasons is not necessarily fatal, provided there is a genuine and consistent policy of passing profits to the charity and those profits are in fact used for charitable purposes.

There remains a clawback risk if, within three years, the property is used or held otherwise than for qualifying charitable purposes.

Practical Steps

Anyone assessing this type of arrangement should:

• confirm that the purchaser is a charity established for charitable purposes only;
• identify whether the property is being relied on as direct charitable use or as an investment;
• review the lease terms between the charity and the trading subsidiary;
• document the subsidiary’s policy for transferring profits to the charity;
• make sure board or trustee minutes record that profits are to be applied to the charity’s charitable purposes;
• keep evidence of actual payments or Gift Aid distributions from the subsidiary to the charity;
• monitor the position for at least three years after completion to avoid a disqualifying event; and
• ensure the SDLT return is completed on the basis that matches the legal analysis of the transaction.

Conclusion

Leasing a property to a charity’s trading subsidiary does not automatically block SDLT charities relief. The key is whether the charity is holding the property as an investment and whether the profits are genuinely applied to the charity’s own charitable purposes. A structured and well-documented profit transfer policy is likely to be central to supporting the relief and reducing clawback risk.

Legal References Used

• Finance Act 2003, Schedule 8, Paragraph 1(3A)
• Finance Act 2003, Schedule 8, Paragraph 2(3)
• HMRC Stamp Duty Land Tax Manual, SDLTM26010
• Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799

This page was last updated on 22 March 2026.

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