Can you split a freehold into long leases without extra SDLT?

Introduction

Owners and investors often buy a freehold building and then want to split it into separate leasehold titles for each flat. A common question is whether that can be done without triggering a second SDLT charge.

This matters because SDLT does not only apply when a freehold is bought. It can also apply when a new long lease is granted. Where connected companies are involved, the rules can become stricter because market value rules and group relief provisions may apply.

This article explains the SDLT position where one company buys the freehold of a building containing two self-contained flats and then grants long leases of the flats to another company.

The Question

A buyer is acquiring a freehold house that contains two self-contained flats. The proposed structure is:

• one company buys the freehold of the whole building; and
• on the same day, that company grants two new 999-year leases of the flats to another company at a peppercorn ground rent, with only limited service charge arrangements.

The buyer wants to know:

• whether SDLT is due only on the freehold purchase or also on the lease grants;
• whether the transactions are likely to be treated as linked;
• whether there is any structure that avoids extra SDLT; and
• how the companies must be arranged if group relief is to be available.

Nick’s Explanation

Nick’s explanation was that the freehold purchase and the later grant of long leases are not treated as the same land transaction. The purchase of the freehold is one chargeable transaction, and each grant of a long lease is also a separate land transaction.

He explained the practical position in simple terms:

“When the freehold company buys the property, SDLT is payable on that purchase. If that company then grants new long leases to another company straight away, HMRC will usually see that as a separate set of transactions linked to the first one.”

He also noted that a peppercorn rent does not solve the problem where connected companies are involved, because the market value rules can apply. In other words, HMRC may charge SDLT by reference to market value rather than the nominal rent or nominal premium.

On structure, Nick’s key point was that simply having the same person as director of both companies is not enough for SDLT group relief. The group test is based on share ownership, not management. In broad terms, one company must be a 75% subsidiary of the other, or both must be 75% subsidiaries of a third company.

He identified two practical routes that are commonly considered:

• keep the whole title in the freehold company and do not grant the long leases immediately; or
• if long leases are to be granted between companies, ensure the companies qualify for SDLT group relief before the lease grants are made.

The Law

The main statutory provisions are in the Finance Act 2003.

• Section 43 FA 2003 provides that the acquisition of a chargeable interest is a land transaction. Under section 43(3), the grant of a lease is treated as the acquisition of a major interest by the lessee and a disposal by the lessor.

• Section 48 FA 2003 confirms that a leasehold estate is a chargeable interest.

• Section 53 FA 2003 contains market value rules for certain transactions involving connected companies. Subject to the exceptions in section 54 FA 2003, SDLT may be charged by reference to market value rather than actual consideration.

• Section 108 FA 2003 deals with linked transactions. Transactions may be linked if they form part of a single scheme, arrangement or series of transactions between the same buyer and seller, or connected persons.

• Schedule 7 FA 2003 provides for SDLT group relief where the statutory conditions are met.

For group relief purposes, the companies must be in the same qualifying group. Broadly, one must be a 75% subsidiary of the other, or both must be 75% subsidiaries of a third company. The test is based on ownership conditions, not simply common directorship.

Analysis

The SDLT analysis usually works in the following order.

First, the purchase of the freehold by the acquiring company is a chargeable land transaction. SDLT is considered on that acquisition in the normal way.

Second, if the freehold company then grants two new 999-year leases of the flats, each lease grant is itself a separate land transaction. That is so even though the leases are created out of the freehold title that the company has just acquired.

Third, if the lease grants are part of the original plan, HMRC is likely to examine whether the transactions are linked under section 108 FA 2003. Doing the lease grants on the same day makes that risk stronger, but delaying them does not necessarily remove it. If the title split and lease grants were contemplated from the outset, HMRC may still view the steps as part of a single arrangement.

Fourth, if the freehold company and the leaseholder company are connected, the market value rule in section 53 FA 2003 may apply. That means SDLT may be calculated by reference to the market value of the leasehold interests being granted, rather than the peppercorn rent or any low stated consideration. This is why nominal lease terms do not automatically prevent an SDLT charge.

Fifth, group relief may remove the SDLT charge on the intra-group lease grants, but only if the statutory conditions in Schedule 7 FA 2003 are met at the right time. The ownership structure must already be in place before the relevant land transaction. If the companies are only put into a qualifying group after the leases are granted, relief will not apply retrospectively.

Sixth, the group must be a real qualifying SDLT group. The same individual acting as director of both companies does not create an SDLT group. Nor does informal common control by itself. The key issue is whether the share ownership and voting rights satisfy the 75% test.

In practical terms, the usual qualifying structures are:

• the freehold company owns at least 75% of the leaseholder company; or
• a holding company owns at least 75% of both the freehold company and the leaseholder company.

Seventh, even where group relief is available, it is not risk-free. There can be clawback if the group relationship breaks within the relevant three-year period after the transaction. That means the structure must not only be correct on the day of the lease grants, but must also be maintained for long enough afterwards.

Finally, the SDLT filing position still matters. Relief is generally claimed through the land transaction return. A failure to file correctly can create avoidable problems even where the substantive relief conditions are met.

Outcome

The practical conclusion is usually as follows:

• SDLT is payable on the freehold purchase by the acquiring company.
• The later grant of long leases to another company is also capable of attracting SDLT as separate land transactions.
• If the companies are connected, HMRC may apply market value rules to the lease grants.
• Granting the leases on the same day does not avoid SDLT.
• Delaying the lease grants may not help if the split was part of the original plan.
• The main route to avoiding an additional SDLT charge on the intra-group lease grants is qualifying for group relief under Schedule 7 FA 2003.

So, if the aim is to split the title into long leases without extra SDLT beyond the freehold acquisition, the safest route is usually either:

• not to grant the long leases at that stage; or
• to ensure the companies are already in the same SDLT group before the leases are granted and that the group relief conditions are properly met and maintained.

Practical Steps

1. Map the intended transaction sequence in writing before exchange or completion. If the plan is always to create long leases, assume HMRC may look at the whole arrangement rather than each step in isolation.

2. Check whether the leaseholder company and freehold company will be connected and whether section 53 FA 2003 is likely to apply.

3. If relying on group relief, confirm that the companies satisfy the 75% ownership conditions in Schedule 7 FA 2003 before the leases are granted.

4. Do not assume that common directors are enough. Review share capital, voting rights and group structure carefully.

5. Consider whether a direct parent-subsidiary structure or a holding company structure is commercially preferable. Either can work for SDLT group purposes if the statutory ownership conditions are met.

6. Check the three-year post-transaction position so that any group relief obtained is not clawed back.

7. Ensure that all SDLT returns are filed correctly and that any group relief claim is made in the return.

8. Coordinate the SDLT analysis with the conveyancing and Land Registry steps, because title-splitting arrangements often involve both tax and property law issues.

Conclusion

Buying a freehold and then carving out long leases to another company will usually create additional SDLT risk, not just SDLT on the original purchase. A peppercorn rent does not by itself prevent a charge, especially where connected companies are involved. If the leases are to be granted within a corporate structure, the main protection is usually SDLT group relief, and that depends on the ownership structure being correctly in place before the leases are granted.

Legal References Used

• Finance Act 2003, s.43
• Finance Act 2003, s.48
• Finance Act 2003, s.53
• Finance Act 2003, s.54
• Finance Act 2003, s.108
• Finance Act 2003, Schedule 7

This page was last updated on 22 March 2026.

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