Do you pay SDLT when splitting a freehold block into leaseholds and moving the freehold to a company?

Introduction

Owners of small blocks of flats often look at splitting a single freehold title into separate long leaseholds. The reasons are usually practical: easier refinancing, simpler future sales, and clearer allocation of borrowing between family members or co-owners.

The Stamp Duty Land Tax (SDLT) position can be difficult, especially where:

• the property is already mortgaged,
• some family members are being released from debt, and
• a connected limited company is intended to hold the freehold.

The key point is that SDLT does not depend only on cash changing hands. It can also arise where debt is assumed, and special market value rules can apply when a company connected with the owners acquires land.

The Question

A family jointly owns the freehold of a block containing three flats. They are considering granting long leases of the individual flats and then transferring the freehold reversion to a newly formed company owned by the family.

The intended structure is broadly:

• one flat to remain jointly owned by all current owners and left unmortgaged;
• two flats to be held by only two of the current owners; and
• those two owners to take over the mortgage debt so that the older co-owners are released from liability.

The main questions are:

• what SDLT applies when the freehold is transferred to the company; and
• what SDLT applies when some co-owners are released from mortgage debt and others take that debt on.

Nick’s Explanation

Nick’s explanation was that two separate SDLT issues need to be kept apart.

First, where a company buys land from people who control it, SDLT is generally charged by reference to market value, even if the transfer price is nil. As Nick put it in substance, if the company acquires the full freehold before any long leases are created, SDLT can be charged on the full market value of what the company acquires.

Second, where family members are released from mortgage liability and the remaining owners take over that debt, the debt assumed is treated as chargeable consideration. The amount of equity being gifted is not the starting point for SDLT. The starting point is the debt taken on.

Nick also highlighted an important practical point about sequencing. In substance:

• if long leases are granted first, the remaining freehold reversion may have only a small value;
• if the company then acquires only that stripped-back freehold, the SDLT position may be much lighter; but
• if the company acquires valuable leasehold interests later, SDLT can arise on the market value of those interests at the residential rates, including any relevant surcharge.

On the mortgage point, Nick’s worked approach was that if a total secured debt of £913,500 ends up being borne only by two of the original four owners, the chargeable consideration can be based on the debt transferred to those two owners, not on the net equity passing between the parties.

The Law

The main SDLT rules in this type of arrangement are found in the Finance Act 2003.

• Section 43 FA 2003: SDLT is charged on land transactions.

• Section 53 FA 2003: where a company acquires land from a person connected with it, market value can be substituted for the actual consideration given.

• Schedule 4, paragraph 8 FA 2003: where property is transferred subject to debt, or where the purchaser takes over liability for debt, the assumed debt counts as chargeable consideration.

• Schedule 4ZA FA 2003: this contains the higher rates for additional dwellings, including the 5 percentage point surcharge where applicable.

For practical SDLT analysis, it is also important to distinguish:

• the grant of a new lease,
• the transfer of a freehold reversion, and
• the transfer or assignment of an existing leasehold interest.

These are separate land transactions and can have very different SDLT outcomes.

Analysis

There are really two transactions to test.

First transaction: transfer of the freehold to a connected company.

If the family transfers the entire freehold to a company they control before granting long leases, section 53 FA 2003 is likely to apply. That means SDLT is not calculated by reference to a token price or nil price. Instead, it is calculated by reference to the market value of the freehold interest acquired by the company.

If the freehold at that stage still contains the full value of the three flats, the SDLT cost can be substantial.

By contrast, if the owners first grant long leases of the flats to themselves, and only then transfer the remaining freehold reversion to the company, the company may be acquiring only a much less valuable reversionary interest. In that case, the SDLT exposure on the freehold transfer may be low, depending on the actual market value of that reversion and whether the company gives any other consideration or assumes any debt.

This is why timing and drafting matter so much. The legal order of events can materially change the SDLT result.

Second transaction: release of some owners from mortgage debt.

Where two co-owners stop owning interests in certain flats and are released from the mortgage, while the remaining two co-owners take over that secured debt, paragraph 8 of Schedule 4 FA 2003 treats the debt assumed as chargeable consideration.

That means SDLT is not worked out by taking the market value of the parents’ shares and deducting their mortgage liability. Instead, the focus is on how much debt the remaining owners are taking on as consideration for acquiring the relevant interests.

Using the figures discussed in the scenario:

• total secured debt: £913,500;
• if half of that debt is effectively taken over from the outgoing co-owners: £456,750 chargeable consideration.

If the higher rates for additional dwellings apply, SDLT is charged at the residential bands plus the 5 percentage point surcharge. On £456,750, the calculation given by Nick was approximately:

• £125,000 at 5% = £6,250
• £125,000 at 7% = £8,750
• £206,750 at 10% = £20,675
• Total: about £35,675

That is materially different from a simple flat 5% calculation across the whole amount. SDLT on residential property is charged by slices, not by applying one single rate to the entire consideration unless a particular band structure produces that result.

It is also important to remember that Multiple Dwellings Relief was abolished for transactions completing on or after 1 June 2024, so that relief is not available for a new transaction completing after that date.

If any part of the planning depends on whether a dwelling is uninhabitable or not suitable for use, readers should be cautious. The threshold is now relatively high following Amarjeet and Tajinder Mudan v The Commissioners for HMRC [2025] EWCA Civ 799. Ordinary disrepair, dated condition, or the need for works will not necessarily take a property outside the normal residential SDLT rules.

Outcome

The practical conclusion is:

• transferring the full freehold directly to a connected company can trigger SDLT on market value under section 53 FA 2003;
• granting long leases first may reduce the value of the freehold reversion and therefore reduce the SDLT on the later freehold transfer;
• releasing family members from mortgage liability can itself create SDLT because debt assumed by the remaining owners counts as chargeable consideration; and
• the SDLT on the debt transfer may be much higher than expected if the higher residential rates apply.

Practical Steps

• Map each proposed step as a separate land transaction: lease grants, freehold transfer, lease transfers, and mortgage refinancing.

• Check the exact ownership and control of the company to confirm whether section 53 FA 2003 applies.

• Obtain a proper valuation of the freehold reversion after the long leases are granted, not just a valuation of the block before the restructure.

• Confirm with the lender exactly when debt is being released and who is assuming liability, because SDLT follows the legal substance of the debt transfer.

• Run the SDLT calculation using residential slice rates and the 5 percentage point surcharge where applicable, rather than using a single flat percentage.

• Make sure the conveyancing documents reflect the intended sequence precisely. A poorly timed completion can change the tax result.

• Consider related taxes separately, including Capital Gains Tax and any company tax issues, because SDLT is only one part of the overall restructuring analysis.

Conclusion

In a family restructuring of a small block of flats, SDLT usually turns on two things: what interest is being transferred, and who is taking on the debt. A connected company acquiring the full freehold can face SDLT on market value, while family members taking over mortgage liability can face SDLT on the debt assumed. In this kind of arrangement, the sequence of steps is often the deciding factor.

Legal References Used

• Finance Act 2003, section 43
• Finance Act 2003, section 53
• Finance Act 2003, Schedule 4, paragraph 8
• Finance Act 2003, Schedule 4ZA
• 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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