SDLT and exchanges HMRC has issued new guidance on SDLT on land exchanges
HM Revenue and Customs has issued guidance on changes to Stamp Duty Land Tax on land exchanges in the Stamp Taxes Bulletin 2/2011.
Prior to the March Budget, when parties exchanged land (including interests in the same land; for example, sale-and-leasebacks), each would pay SDLT on the market value of what it acquired.
The result is that if A transfers land worth £100 to B, in exchange for B transferring land to A worth £80, A pays SDLT on £80 and B pays SDLT on £100. Of course, B might also be paying A £20 of “equality money” (or equivalent value), but the market value rule was an exclusive one, and other elements of consideration were irrelevant. That makes sense because the full value of each piece of land is subjected to SDLT.
Although, SDLT is paid on any VAT that attaches to a transaction, one consequence of the market value charge was that SDLT would not fall on any VAT, even if payable. This was because the concept of market value is based on a hypothetical transaction to which VAT does not apply (and because of the exclusive nature of the market value charge).
Independent of the 2011 changes, HMRC was apparently considering the position that, despite the market value rule and existing HMRC practice, SDLT might in fact be payable on VAT (if payable) on market-value-based transactions.
However, the Finance Bill 2011 provided that instead of looking at the market value of the interest acquired, SDLT would fall on (if higher) whatever the consideration would be for the acquisition in the absence of the market value rule. Hence, if a purchaser gives more than what the land is worth, SDLT falls on the higher amount.
One consequence is clearly a change to the treatment of SDLT on VAT on exchanges. Since the VAT would form part of the consideration, SDLT would be due on the VAT as well (on the basis the result will be higher than market value). HMRC points this out in its recent guidance on exchanges, although the issue is still of significance in other situations where SDLT is determined according to market value, for example, transfers between connected companies. HMRC’s comments suggest that in those situations it continues to be the case that SDLT does not fall on any VAT payable.
Properties of unequal value
A broader issue is what the new test means where properties of unequal value are exchanged. In the above example, a plausible result would be that A and B have to pay SDLT on £100. For A, the higher of the market value of what it acquires (£80) and what it would otherwise be treated as giving as consideration (the land it transfers to B) is £100. B is also chargeable on £100 because it has acquired land worth £100.
The focus of HMRC’s guidance is to address this issue by examples. The first two address the issue by allowing that although a party may give greater in chargeable consideration than the value of the land it acquires, it is possible to apportion that greater chargeable consideration between what is given for the land acquired, and some other (non-chargeable) matter.
In a non-commercial context, HMRC suggests that a party that gives a property to a family member in exchange for a less valuable property will pay SDLT only on the lesser value of the acquired property, because the excessive value of what is given is properly apportioned to being a “gift”, and is not consideration for the acquisition.
To change the situation slightly; if two people exchange properties but equality money is paid by one, HMRC says that the person who acquires the less valuable property can similarly attribute the excessive value of the property they transfer to being consideration for the equivalent amount of money they receive (rather than for the land they receive). This is certainly helpful, and appears to maintain the status quo.
HMRC’s final example concerns a developer selling a property worth £5m to a purchaser for a nominal sum plus a 999-year leaseback to the developer at nominal rent. HMRC says that the value of what is acquired by the purchaser is nominal, given the obligation to grant the leasebacks. That much is clear. The concern under the new rules would be that the purchaser would pay SDLT on the (£5m) value of the leaseback because this is the consideration given for the acquisition. Although the guidance is favourable, it is difficult in this case to see how it fits with the law. The leaseback is consideration for the purchase or it would by definition not be an “exchange’.
Unfortunately, the result seems to be one of legislating and curbing the effects by HMRC guidance, with resulting uncertainty in the law’s application.
Kevin Ashman is a partner in the tax practice of Hogan Lovells
