Is SDLT payable when a home is transferred to a company subject to a covenant to pay the children?

Introduction

Readers often ask whether Stamp Duty Land Tax (SDLT) can be reduced where a residential property is transferred to a company for no cash price, but the company takes on some other legal obligation instead. A common example is a transfer linked to family arrangements, such as a covenant requiring payments to children out of future rental income.

The key SDLT questions are usually these: does the covenant count as chargeable consideration, does the market value rule apply, and are residential or non-residential rates used? The answers depend on the exact legal structure, especially whether the transferor is connected with the company and whether the obligation assumed by the company has a measurable value.

The Question

A former matrimonial home is being divided into two separate dwellings. One dwelling will be retained personally by the existing owner. The other dwelling, with a market value said to be around £700,000, is intended to be transferred to a newly formed limited company.

No cash will be paid to the transferor. Instead, the company will take the property subject to a legally binding covenant requiring it to make monthly payments to the couple’s children over a long period, apparently funded if the property is let. The total undiscounted payments are said to be £360,000, and the expected market rent is around £2,400 per month.

The issue is how SDLT would be calculated on that transfer.

Nick’s Explanation

Nick’s core view was that the company’s covenant can amount to chargeable consideration for SDLT purposes, even though no money is paid directly to the seller. In anonymised form, his reasoning was:

“Chargeable consideration is not limited to cash. If the buyer accepts a legally enforceable obligation as part of the transfer, that obligation may be money’s worth and therefore taxable consideration.”

He also explained that if the payments are contingent, SDLT is still not avoided. Instead, the legislation requires a reasonable estimate of the value of that contingent consideration at the effective date of the transaction.

Nick further noted that the market value rule could be decisive. If the seller is connected with the company, SDLT may be charged by reference to the market value of the dwelling rather than the estimated value of the covenant. If the seller is not connected with the company, there is an argument that SDLT is based only on the actual consideration given, namely the value of the covenant.

On rates, Nick suggested there may be an argument for non-residential treatment because of the unusual structure and the fact that the company is assuming a payment obligation rather than making a straightforward acquisition for its own rental profit. However, that point is more uncertain than the basic consideration analysis and would need careful review against the residential property rules in Finance Act 2003.

The Law

SDLT is charged on land transactions under Part 4 of the Finance Act 2003.

Under section 43, SDLT is charged on a land transaction where there is an acquisition of a chargeable interest.

Under section 48(1) Finance Act 2003, “chargeable consideration” includes money or money’s worth given for the subject matter of the transaction, directly or indirectly, by the purchaser or a person connected with the purchaser.

That means SDLT is not limited to a cash purchase price. If the buyer undertakes an economically valuable legal obligation as part of the acquisition, that obligation may be chargeable consideration.

Where the consideration is contingent, uncertain or unascertained, section 51 and Schedule 6 Finance Act 2003 apply. Broadly, the purchaser must make a reasonable estimate of the amount or value of the consideration at the effective date of the transaction.

The market value rule is found in Schedule 4 paragraph 1 Finance Act 2003. In broad terms, where the purchaser is a company and the vendor is connected with it, the chargeable consideration is taken to be not less than the market value of the property.

Whether parties are connected is determined by the relevant tax connection rules, including section 1122 of the Corporation Tax Act 2010.

Classification as residential or non-residential property is governed by section 116 Finance Act 2003 and related provisions. A building used or suitable for use as a dwelling will normally be residential property. In “uninhabitable” or “not suitable for use” cases, the threshold is now relatively high following Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799.

Analysis

The analysis can be broken down into four main steps.

First, there is plainly a land transaction. A dwelling is being transferred to a company, so SDLT must be considered.

Second, the absence of a cash price does not mean there is no chargeable consideration. If the company acquires the dwelling subject to a covenant requiring it to make monthly payments to the children, that covenant may amount to money’s worth. The economic burden assumed by the company is part of what it gives in return for the transfer.

Third, because the payments are future and conditional, the legislation does not simply ignore them. The value must be estimated on a reasonable basis at completion. In practice, that would usually involve assessing:

• the amount of the future monthly payments;
• the length of time over which they may be payable;
• the likelihood that the trigger condition will be met, if the covenant only bites when the property is rented; and
• an appropriate discount to reflect present value rather than total undiscounted payments.

So, if the total undiscounted payments are £360,000, the SDLT consideration may be materially lower than that once discounted to a present value and adjusted for contingency. That is the basis of Nick’s estimate that the taxable consideration might be around £250,000, although the correct figure would depend on evidence and valuation methodology.

Fourth, the market value rule may override all of that if the transferor is connected with the company. This is the point that matters most. If the transferor has control of the company, a beneficial interest in it, or is connected with those who control it, Schedule 4 paragraph 1 may substitute the full market value of the dwelling. On the facts provided, the suggestion was that the transferor would have no shareholding, beneficial interest or control. If that is correct, the argument is that the market value rule should not apply.

The rates question is more difficult. A self-contained dwelling transferred to a company will usually be treated as residential property, and if the company is buying it, the higher residential rates may be relevant. The mere fact that the consideration is unusual does not necessarily change the character of the property. Nick identified a possible argument for non-residential treatment because the arrangement resembles a conduit or funding structure rather than a normal investment acquisition, but that is not the strongest part of the analysis. In many cases, HMRC would be likely to start from the position that a dwelling remains residential property unless a clear statutory basis points the other way.

There is also no obvious “unsuitable for use as a dwelling” point here. The property is being split into dwellings and appears intended for residential occupation. In any event, after Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799, the threshold for arguing that a property is not suitable for use as a dwelling is relatively high.

Outcome

The practical conclusion is as follows.

A covenant requiring the company to make payments to the children can amount to chargeable consideration for SDLT, even if no cash is paid to the transferor. If the covenant is contingent, SDLT is calculated using a reasonable estimate of its value at the effective date.

If the transferor is not connected with the company, there is a credible argument that SDLT should be charged by reference to the estimated value of the covenant rather than the full market value of the dwelling.

If the transferor is connected with the company, the market value rule may apply and SDLT may instead be charged by reference to the property’s market value.

The argument for non-residential rates is more uncertain and should be treated with caution where the asset being transferred is plainly a dwelling.

Practical Steps

Anyone considering a similar arrangement should work through the following points carefully:

• Confirm exactly who will own and control the company after the transfer.
• Check whether the transferor is connected with the company under section 1122 Corporation Tax Act 2010 and related rules.
• Have the covenant drafted as a genuine, legally enforceable obligation forming part of the transfer terms.
• Obtain a proper valuation of the covenant, including contingency and present value analysis.
• Review whether the property is clearly residential for SDLT purposes and whether any higher residential rates apply.
• Ensure the SDLT return reflects the basis adopted for the consideration and includes any required estimates of contingent consideration.
• Take transaction-specific advice before exchange or completion, because small changes in ownership or control can trigger the market value rule.

Conclusion

Where a dwelling is transferred to a company for no cash but subject to a covenant to make future payments, SDLT is not automatically avoided. The covenant may itself be chargeable consideration. The most important issue is whether the transferor is connected with the company. If not, SDLT may be based on the estimated value of the covenant. If so, market value may be substituted instead.

Legal References Used

• Finance Act 2003, Part 4
• Finance Act 2003, section 43
• Finance Act 2003, section 48(1)
• Finance Act 2003, section 51
• Finance Act 2003, Schedule 4 paragraph 1
• Finance Act 2003, Schedule 6
• Finance Act 2003, section 116
• Corporation Tax Act 2010, section 1122
• 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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