SDLT The stamp duty land tax implications of sale and leaseback schemes and the conditions for claiming relief are considered by Tom Hubbard
QUALIFYING CONDITIONS |
Section 57A(3) states: (3) The qualifying conditions are – (a) that the sale transaction is entered into wholly or partly in consideration of the leaseback transaction being entered into, (b) that the only other consideration (if any) for the sale is the payment of money or the assumption, satisfaction or release of a debt (or both), (c) that the sale is not a transfer of rights… and (d) where A and B are both bodies corporate at the effective date of the leaseback transaction, that they are not members of the same group for the purposes of group relief at that date. |
Under sale and leaseback (SLB) schemes, an owner-occupier sells the freehold of one or more properties and the buyer immediately grants it a lease of the premises. It is not a new concept; it was established in
A large number of supermarkets and high street retailers, as well as numerous banks, hotels and pubs, have conducted sale and leasebacks in recent years.
SLB schemes enable a business to:
? release substantial capital from property assets to finance growth in other areas, while continuing to occupy the property for the purposes of its trade or business;
? obtain tax benefits by offsetting lease costs as an operating expense;
? use profits realised by the disposal for corporate accounting;
? reduce the risk of fluctuations in property values; and
? increase flexibility, by allowing it to break leases and relocate.
With the sale and the leaseback each being a separate land transaction for SDLT purposes and with leasebacks typically being for 20 years or more (longer than the average new commercial lease), SDLT can be a significant cost in SLB transactions.
For example, A sells a property to B for £2m and B grants a leaseback to A for 20 years at £100,000 pa. Even ignoring VAT (remember that a sale and leaseback can never be a transfer of going concern for VAT purposes), that would give rise to a liability of £80,000 on the freehold transfer and £12,700 on the leaseback.
Exchange of properties
Sale and leaseback is treated, within section 47 of the Finance Act 2003, as an exchange of properties for SDLT purposes. This means that it is payable on the true market value rather than on the sums actually documented and paid.
Where a written agreement to grant the leaseback exists at the time the sale is completed, the market value for the sale should reflect the obligation to grant the leaseback; otherwise, the value of the unencumbered property will be required. The transaction can sometimes be structured to achieve whichever is the more favourable result.
SLB schemes benefit from a relief that exempts the leaseback element of the transaction from SDLT. This represents a saving for the seller in transactions where the leaseback would otherwise be subject to a potentially substantial charge to SDLT on the net present value of the lease.
The relevant legislation is contained in section 57A of the 2003 Act, which was originally inserted by the Stamp Duty and Stamp Duty Land Tax (Variation of the Finance Act 2003)(No 2) Regulations 2003 and was then substituted by the Finance Act 2004. The qualifying conditions are set out in section 57A(3), as amended: see box above.
Extended relief
The relief has been extended in some respects and can be claimed in the following situations:
? Lease and leaseback: Although originally limited to sale and leaseback, relief is now available for lease and leaseback transactions. In the hypothetical example used above, had A granted a 999-year lease to B for a £2m premium instead of selling the freehold, relief would still be available on the leaseback to A.
? Downsizing: The extent of the property comprised in the leaseback need not comprise all the land sold. Relief would still be available if A were taking a lease of only part of the land sold to B.
? Multiple properties: HMRC guidance confirms that it is possible to have one sale with multiple leasebacks – or several sales with only one leaseback. If A’s transfer to B comprised three sites but A took a separate leaseback of each individual site, A would still qualify for relief on each leaseback.
? Residential property: Although originally restricted to commercial property, the relief now applies also to residential property.
However, relief can be denied in some circumstances:
? Prohibited consideration: HMRC has confirmed that any consideration for the sale, other than the grant of the leaseback and/or cash or the assumption of debt, will render the relief unavailable. Thus, if the hypothetical transaction involved B agreeing to carry out construction or fit-out works for A’s benefit as part of the consideration for the sale, relief would be denied. The transaction would have to be restructured so as to preserve the relief.
? Group companies: If the parties belong to the same group of companies they will not qualify for the relief ;they may, however, qualify for group relief.
? Additional property: The extent of the property comprised in the leaseback cannot include additional land that is not included in the sale.
If the leaseback to A was intended to include adjoining land already owned by B (or being acquired by B from a third party), the additional land would have to be dealt with separately, although B’s grant of that additional lease might still constitute prohibited consideration for the sale leg.
Strict interpretation
The conditions attached to the relief and the relevant guidance should be scrutinised, at the outset, in the light of the proposed transaction. This will ensure that the relief can be validly claimed.
HMRC applies a strict interpretation to these conditions and any deviation could mean that the relief will not be available. It may still be possible, however, to restructure the transaction to minimise SDLT on the sale and maximise the relief on the leaseback.
Tom Hubbard is a commercial property solicitor at Hill Dickinson LLP
