Stamp Duty Land Tax – A Sub-Sale Relief Overview

Stamp Duty Land Tax (‘SDLT’) is a tax on land transactions. A land transaction is defined as a ‘chargeable interest’ and includes the purchase of your home, or the lease of your commercial premises. There are various forms of SDLT relief that can be applied for, here we take a brief look at ‘sub-sale relief’.

The SDLT payable on transactions is calculated as a percentage of the price you paid (for example, the purchase price or total rental value of the lease). This overview will not delve into calculations of SDLT (HMRC has its own useful SDLT calculator).

What is sub-sale relief?

There are various means of relief a buyer (in this case, the term buyer also includes tenant and any other person required to submit an SDLT return) can apply for.

Sub-sale relief is available to a buyer who enters into a contract to complete a land transaction and before that land transaction completes, transfers the rights for that land transaction to a third party. For this to occur, the following two things both need to happen:

1. two parties enter into a contract for a land transaction (a sale or lease, for example); and
2. the buyer of the first land transaction agrees to enter into a further land transaction (a sub-sale or assignment) for the property involved in the first transaction with a third party, before the original transaction completes.

In this case, both buyers (the buyer of the first land transaction and the person to whom they have agreed to transfer the rights of that transaction to) are required to submit SDLT returns and therefore pay the necessary SDLT, but the first buyer is then entitled to claim the relief. This relief will not be granted, however, if it can be proven that the sub-sale arrangements were carried out as part of a tax avoidance scheme.

The relief is designed to ensure that SDLT is only paid by the end transferee, the person who actually ends up acquiring the property (or land).

What qualifies for sub-sale relief?

There are two types of transaction that qualify for sub-sale relief – an assignment of rights (where a buyer assigns the right to the land transaction to a third party) and what HMRC refer to as a ’free-standing transfer’.

Assignment of rights

An assignment of rights will occur when a third party completes the original contract. For example, a buyer (‘B’) enters into a contract to purchase a shop from a seller (‘S’). Before that purchase completes, B assigns the rights to the contract to an assignee (‘A’). ‘A’ would then become the transferee under the original contract, and ‘B’ would no longer be part of the transaction.

‘B’ would, however, still need to submit an SDLT return, calculating the SDLT payable based on the amount they would have paid under the original contract. ‘B’ would then claim sub-sale relief.

‘A’ would also be required to submit an SDLT return, and would calculate the SDLT payable based on the price they actually paid.

Free-standing transfers

A free-standing transfer is any other land transaction which allows a buyer to claim sub-sale relief, that is not classified as an assignment of rights. An example of this would be if ‘B’ and ‘S’ entered into a contract for the sale of an office block and before that purchase was completed, ‘B’ entered into a further contract with a third-party buyer (‘TPB’) to sell the office block (or part of it) to ‘TPB’ once the original contract between ‘B’ and ‘S’ has completed.

In this case, ‘B’ would of course submit an SDLT return for their purchase, calculating the SDLT payable based on their actual purchase price. In doing so, they will claim sub-sale relief.

‘TPB’ would submit their own return, calculating the SDLT payable based on the amount they paid under their contract with ‘B’.

Sub-sale relief will not be available if the original contract (between ‘B’ and ‘S’) completes before a contract for a sub-sale (i.e. between ‘B’ and ‘TPB’) is entered into.

Connected parties

It may not always be the case that ‘TPB’ or ‘A’ calculates SDLT based on the actual price they paid for their transaction. If the transaction is not at arm’s length or if ‘B’ and ‘A/TPB’ are connected parties (i.e. related, married or business partners), ‘A’ or ‘TPB’ will calculate SDLT using the highest of these figures:

• The amount payable by ‘A/TPB’ to ‘B’; or
• The amount ‘B’ agreed to pay to ‘S’.

As an example, ‘S’ enters into a contract to sell a restaurant to ‘B’ for £500,000. Before that contract completes, ‘B’ enters into a separate contract with ‘TPB’ to sell the restaurant for £450,000. ‘TPB’ will pay SDLT calculated using the price of £450,000 unless ‘B’ and ‘TPB’ are connected (or if the transaction has not taken place at arm’s length). If they are connected (or if the transaction is not at arm’s length), ‘TPB’ will pay SDLT calculated using the price of £500,000.

This measure has been incorporated in an effort to prevent tax avoidance.

Land Transaction Solicitors

BHW Solicitor’s Commercial and Residential Property departments have experience of dealing with all kinds of land transactions. For all enquiries, call 0116 289 7000 or email info@bhwsolicitors.com.

BHW Solicitors are not tax advisors and SDLT is an extremely complicated area of tax. Accordingly, we would always recommend taking the advice of a tax expert before proceeding with any land transaction.