Transactions in rights of light (“ROL”) crop up frequently in property development and can be a pain to deal with. A ROL confers the enjoyment of uninterrupted use and access of light to a building by creating an enforceable easement over land through which the light passes to it. Developers often pay the ROL holder to release their ROL affected by the developed property to avoid the development being held hostage. As developers negotiate the ROL releases, stamp duty land tax (“SDLT”) can be overlooked.
SDLT is payable where the developer, or a connected person, gives consideration to the ROL holder for it to release or procure the release of the ROL easement. The SDLT is calculated by applying the relevant rates to the amount or value consideration given.
Beyond this, SDLT is sensitive to the arrangements and a number of issues might be overlooked in ROL transactions.
Exchanges
Developers may obtain a ROL release if they provide a reciprocal release (or procure the release from tenants of their own property) of a ROL and/or the freehold or leasehold estate over other land. The SDLT treatment of such arrangements depends on whether a “major interest” is involved.
The value of the reciprocal ROL release, without an accompanying disposal of a major interest (a freehold or leasehold estate), is not treated as chargeable consideration, but the developer will be liable to SDLT on anything else given in money or money’s worth.
However, if, say, the developer, must grant a lease of a unit in the building being developed in exchange for the ROL release, SDLT will apply to the higher of:
- the value of the grant of the lease and, if applicable, the value of the reciprocal ROL release (VAT inclusive); or
- the value of the ROL release acquired (VAT exclusive).
Market value
SDLT may apply to the market value of the ROL release (arguably calculated by the extent to which the value of the benefited land is increased) where:
- the developer, a company, is connected with the ROL holder (eg the ROL holder controls the developer); or
- the consideration given for the release includes the issue of shares in a company connected with the ROL holder; and if
- the amount or value of the consideration given is less than the market value of the ROL release, subject to the availability of SDLT group relief (or another SDLT relief).
SDLT rate
SDLT rates depend on whether the subject-matter of the transaction is residential property (as high as 15%) or non-residential (as high as 5%).
Which SDLT rates apply to ROL releases is uncertain as the application of the legislation is not entirely clear and there is no published HMRC guidance on point.
A ROL release that is dealt with as a severed interest from the underlying land it benefits should, arguably, be subject to the commercial rates even if the underlying land it benefits is used for residential purposes. The SDLT legislation (the Finance Act 2003) defines residential property to mean:
“(a) a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use, and…, or (c) an interest in or right over land that subsists for the benefit of a building within paragraph (a)…”
So while a ROL release can be an interest/right that benefits a dwelling, the better view is, in the author’s opinion, that use of the word “and” rather than “or” in the definition requires the interest to pass with the dwelling in order to be treated as residential property. That is, the residential SDLT rates are engaged if the benefit of the ROL release is transferred or granted with the dwelling it serves, but the commercial SDLT rates are engaged if the transaction is over the interest severed from the dwelling.
Other issues to bear in mind
- Chargeable consideration is inclusive of any VAT chargeable in respect of the transaction unless SDLT applies to the market value of the ROL release.
- Chargeable consideration can include the fees/costs (eg ROL surveyor costs and legal fees) the developer agrees to pay on behalf of the ROL holder.
- Chargeable consideration includes overage or deferred payments. Where the amount is contingent or uncertain and may be paid more than six months after completion, an application may be made to defer payment of the SDLT attributable to this part of the consideration until it becomes payable (saving interest on what would otherwise be late paid SDLT). Where the payment of the consideration is just deferred, SDLT cannot be deferred and there is no discount for postponement of the right to receive the consideration.
- The open market value of services (VAT inclusive) provided by the developer as consideration for the ROL release is chargeable consideration.
- Court-ordered damages for ROL breach are unlikely to be chargeable consideration.
- Amending/varying a ROL release to cover a development project not covered under the original release may be a linked SDLT land transaction. If the same parties are involved, the later ROL transaction may result in additional SDLT being payable on the earlier ROL transaction.
- Special charging rules may apply if the transaction is between existing, incoming or exiting partners, or connected persons, and the partnership.
- The developer, whose interest is benefited by the ROL release, must file an SDLT return if tax is payable or would be payable but for a claim for relief. The threshold for paying tax is £125,000 for a residential property transaction and £150,000 for a non-residential or mixed-use property transaction.
- A tacit ROL release is not an SDLT transaction (eg where the ROL holder acquiesces to a ROL breach or fails to challenge a light obstruction notice that terminates the ROL if unchallenged after one year) provided that the developer does not obtain any enforceable right as against the ROL holder.
Sinisa Butina is an assistant manager at KPMG LLP. The views expressed are his and not necessarily shared by KPMG LLP
