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Stamp Duty Land Tax - Many Unhappy Returns
- AuthorClaire Battye
Here we highlight the pitfalls that can occur regarding Stamp Duty Land Tax on an apparently straightforward transaction involving several leasehold warehouse properties. A recent deal is used as an example, with names changed for confidentiality.
What is Stamp Duty Land Tax?
Stamp Duty Land Tax (SDLT) was introduced by the government on 1 December 2003 as a replacement for Stamp Duty that many would have been familiar with. A cynic might say it was a thinly disguised way of extracting large sums of money from what would have been seen at the time as a buoyant sector of market activity within England and Wales.
Since the credit crunch and collapse of the property market it has received its share of criticism and it is fair to say that this is one of the least popular taxes on the statue book today, particularly among property lawyers.
Deal or No Deal?
To set the scene with a recent case being used for the purposes of this article, Heads of Agreement are received from agents setting out the terms of a new lease. Units A & B are to be let to the client on a new 5 year lease. The client has other units on this estate. Rent is to be £31,000 per annum until 2015 when it goes up to £53,900, with VAT payable on the rent. The transaction is subject to conditions including the grant of 5 year extensions on the client’s existing units X, Y and Z. Rents for each of these are £32,000, £34,000 and £27,000 respectively.
SDLT is subject to various anti-avoidance provisions which were added, somewhat hastily, when the original legislation was drafted. When leases of property are being entered into simultaneously between the same parties the anti-avoidance provisions deem these to be linked transactions. Linking can either be due to the simultaneous nature of the deals or because they relate to renewals of existing leases (successive linked leases).
The case we are discussing raises potential for both types of linking.
Were they to be treated as separate transactions then each lease transaction would be allowed its own nil rate band of £150,000; if they are linked then there is only 1 nil rate band allowed for the whole transaction. The figures below should help to illustrate the problem:
- In this case A and B are obviously linked and SDLT for that transaction is £898.
- Taken separately X has SDLT of £233, Y of £342 and Z of £0.
- If all 5 transactions are linked this means total duty of £6,518, a substantial figure when compared to the individual sums.
If SDLT is calculated incorrectly, the client could be fined and subject to penalties. The fine can be up to 50% of the tax due.
Where do we go for guidance?
Case law on this subject is thin on the ground and we have to look back to the old Stamp Duty regime for any sensible guidance. There is a case, Attorney-General v Cohen 1937, where it was decided that when a taxpayer bought 6 houses from the same seller at auction these were not linked transactions. However this precedent is rendered unhelpful by the anti-avoidance provisions which were brought in to stop people from breaking transactions down into smaller parts to reduce the tax payable.
In the example case, on examination of the facts, we advised that to be 100% safe all the leases should be treated as linked and so the SDLT payable was £6,518. However, on further scrutiny surrounding the actual negotiations, we were able to advise that Units A and B were definitely linked (SDLT of £898), X and Y were probably linked (SDLT of £2,075) but Z could be viewed as separate. This was despite the agents indicating that one part of the deal was conditional upon the other.
By this stage however, the client was thoroughly perplexed and disheartened by the experience and withdrew. For that reason we did not get into a discussion as to whether the renewal leases on Units X, Y and Z could be said to be linked to the existing leases for those units (successive linked leases).
What does the future hold?
On the basis of the SDLT analysis alone this transaction did not proceed, despite our best efforts. This is not a solitary case and proves that SDLT can have a significant impact on the success of transactions. This should be considered a warning to government that their attempts to raise revenue from taxes may in fact be hindering the future growth of the commercial property market.
If you would like more information about Stamp Duty Land Tax, Warner Goodman Commercial Team on 02380 717717.
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.