Stamp Duty Land Tax (SDLT)


Stamp Duy Land Tax

This article is about Stamp Duty Land Tax which applies to properties in England only. For properties in Wales, the equivalent tax is Land Transaction Tax (LTT). For information on LTT click here.

What is Stamp Duty Land Tax?

Stamp Duty Land Tax (SDLT) is the new name for stamp duty. Stamp duty is a tax payable on property purchases. The basic rates are as follows:-

Price Range (£)


0 – 250,000


250,001 – 925,000


925,001 – 1,500,000


1,500,001 +



To clarify, consider the following worked examples 

Example 1: Purchase price = £300,000

First £250,000



Balance of £50,000



Total Tax




Example 2: Purchase Price = £2,000,000

First £250,000



Next £675,000



Next £575,000



Balance of £500,000



Total Tax




It is now necessary for a purchaser of land where the purchase price is £40,000 or more to complete and file a tax return, known as a form SDLT1. This is normally done by the purchaser's conveyancer. The SDLT1 must be completed even if no tax is actually payable.

Obtaining a Blank SDLT1 Form

The tax return required is called an SDLT1. It cannot be reproduced here since each one is individual, having its own unique reference and you should avoid using forms not obtained directly from HMRC. A form together with a payslip (which is also unique) can be obtained online or by calling the HMRC Order line on 0845 302 1472. Most conveyancers will submit returns online.

Completing the SDLT1

The Inland Revenue's guidance on completing the SDLT1 and any additional forms needed can be found on HMRC's website. You should complete the return as far as possible prior to exchange of contracts. This will help to avoid delays in submitting the return following completion and so help to avoid the penalties described below.

Time Limits and Penalties for Returning the SDLT1

The return must be received, correctly completed, by HMRC no later than 14 days following completion of the transaction. Failure to do so incurs a penalty of £100, whether or not any tax is actually payable. If the return is more than 3 months late then the penalty is £200 and also interest on the duty payable (if any) will begin to accrue and be payable.

If the return is more than 12 months overdue an additional penalty, up to the total amount of tax due on the transaction, may be charged.

The SDLT5 Revenue Certificate

Following the submission of a correctly completed return together with any duty payable HMRC will issue a Revenue Certificate known as the SDLT5. It is necessary to submit this certificate to H M Land Registry along with the application for registration of the purchase. Without this certificate the transaction cannot be registered.

Form SDLT60

Form SDLT60 was introduced in 2002 to be used in cases where it was not necessary to submit a return to HM Revenue & Customs in form SDLT1 (for example transfers resulting for a court order or transfers for no value). It was a self-certificate of exemption and was sent to the land registry in place of an SDLT5.

Following a change in the rules designed to simplify the process however no form now needs to be submitted in situations where the SDLT60 would previously have been used; therefore it is effectively now obsolete.

Stamp Duty Avoidance

As with any tax, people will always look for ways to avoiding paying stamp duty land tax. There are methods which are legal and methods which are not. The Finance Act 2003 contains anti-avoidance provisions. Some are specific to known avoidance arrangements and others are more general. These are complex and anyone fearing they may fall foul of them should seek specialist advice, but the essence of the rules is that transactions or arrangements entered into, which serve no purpose other than to reduce the amount of SDLT which would otherwise be payable, should be disregarded when calculating the tax.

For example, say the property is valued at £295,000 but the total purchase price of a property is £300,000 which includes all of the contents, but the buyer and seller agree that the buyer will pay £250,000 for the property (and so pay no SDLT) and £50,0000 for the contents, this serves no other purpose than to artificially reduce the SDLT bill, and it will not permitted. The purchase price will be treated as being £295,000.

For further information on specific SDLT related topics you can follow the links below:

Higher Rate of SDLT for 2nd Homes

15% Surcharge for Certain Purchases by Companies

15% Surcharge for Certain Purchases by Companies

First Time Buyer Relief

Non-UK Resident Surcharge

Group Relief

Housebuilders Taking a Property in Part-Exchange

Mixed Use Property

Multiple Dwelling Relief

Properties Purchased from Deceased Estates by Property Traders

Six or More Properties Purchased in a Single Transaction

Transactions in Connection with Divorce

Transfers Between Spouses and Civil Partners

Uninhabitable Property

Section 53 of the Finance Act 2003 – the “deemed market value rule”

Forms of Non-cash Consideration for SDLT Purposes

Linked Transactions

Annual Tax on Enveloped Dwellings (ATED)

Partnership Incorporation Relief

Sale and Leaseback Relief

Transfers of Equity

Higher Rate of SDLT for 2nd Homes

In 2016, the Government introduced, via s128 of the Finance Act 2016, a new SDLT surcharge for purchases of 2nd or subsequent dwellings. The charge is 3% of the whole of the purchase price and applies to transactions where the purchase price is £40,000 or more.

The basic rule is that if, at the end of the day which is the day of completion the purchaser (or if there is more than one purchaser, any of the purchasers) owns another residential dwelling anywhere in the world, the surcharge will be payable in addition to the basic rate tax. For example, at the time of writing the zero rate threshold is £250,000 and the between £250,001 and £925,000 it is 5%, so a purchase of an additional dwelling at £300,000 would incur a liability of £11,500, that is to say:

Standard Rate

First £250,000



Next £50,000



Total Standard Rate Tax










Total Surcharge






Total Liability




Exceptions to the Additional Home Surcharge

There are some important exceptions, contained both in s128 Finance Act 2016 and Schedule 11 of the Finance Act 2018, designed to ensure that as many people as possible are not unfairly prejudiced. Some of these are detailed below.

Replacing Main Residence

Where the purchase property is a replacement for the purchaser(s) main residence then the surcharge in not payable, regardless of the number of other properties owned. This does however require the purchaser to have actually owned his or her previous main residence and to be selling it (or giving it away) simultaneously with the purchase (or to have sold it / given it away not more than 3 years prior to completion of the purchase). Giving up a tenancy of a rental property does not count as replacing one’s main residence – so if a purchaser already owns a holiday home or a rental property and buys his or her first home, the surcharge will be payable.

Other points to consider:

  • Where there are two or more purchasers, each one who already owns another property must be disposing of their main residence (but it need not be the same residence); unless
  • The purchasers are married to / in a civil partnership with each other in which if one disposes of his/her main residence the other is also treated as having done so even if the other was not a joint owner; and
  • Only properties where the purchaser’s share is valued at £40,000 are to be taken into account and if there are two or more purchasers their interests in other properties must be considered separately. For example if a couple own a rental property worth £70,000 in equal shares, so that each own a share worth £35,000, this property should be disregarded. Equally, if they own 10 properties in equal shares, each worth £70,000, they should all be disregarded;
  • If the purchaser is buying in his/her personal name and owns properties via limited company, those properties are to be disregarded; but
  • All properties purchased by limited companies and limited liability partnerships are liable for the surcharge, even where the company owns no other properties.

Sale of Previous Main Residence Following Purchase

For practical reasons, a person my find themselves in the position of having to buy their next home before they are able to sell their current one. In this case, they would initially pay the surcharge but may be able to recover it if they sell or give away their previous residence within 3 years following the date of completion of the purchase of the new dwelling provided that:

  • The previous property was their main residence prior to completion of the purchase (though they need not have been in occupation immediately prior to the purchase for example if they have been in rental accommodation pending completion of the purchase);
  • The new property was acquired with the intention of it being their main residence and it ultimately becomes so (albeit they need not move in immediately); and
  • Completion of the sale takes place within three years (this deadline is applied strictly and there is absolutely discretion available)

Use of Property as the Main Residence is a Matter of Fact

Where more than one property is owned, it is not possible to elect which one is the main residence, it is a matter of fact as to which is genuinely occupied as the person’s home. If a person has for example a flat they occupy in the city during the working week and a house in the country where they spend weekends and other time away from work, then consider things like, what address is given for correspondence? If the person lives with a partner, which property does the partner occupy? What about children? It will usually be clear which is “home”.

Non-residential and Mixed Use

The surcharge applies only to residential dwellings, not purchases of non-residential or mixed use properties, but buy to let residences are residential.

Purchaser is Treated as Owning any Property Owned by His/Her Spouse or Civil Partner

Where a person who is married or in a civil partnership buys a property and his/her spouse or civil partner is not a joint purchaser, but owns one or more properties alone (or else with someone other than their spouse or civil partner), the purchaser is treated for SDLT purposes as owning that property, so that the higher rate surcharge may be payable even if this new purchase will be the purchaser’s only property. This does not apply however if the couple are no longer “living together” for the purposes of s1116 of the Corporation Tax Act 2010, i.e. they are separated in circumstances likely to become permanent.

Surcharge for Certain Purchases by Companies

Where a corporate body (i.e. an LLP or Limited Company) acquires residential property for £500,000 or more, the rate of SDLT will be 15% on the whole of the purchase price (so £75,000 for a purchase at £500,000). An important exception to this is where the following conditions are met:

  • The business must be a “property rental business”; and
  • The property must be acquired with a view to profit

A property rental business is in this case though not in all cases defined in ss 204 and 205 of the Corporation Tax Act 2009 and means a business which acquires property for the purpose of letting it with a view to profiting from the rent, so that buy to let landlords ought to be exempt from the 15% rate and instead pay the standard rate plus 3% additional home surcharge.

Should the property cease to be used as part of the property rental business within 3 years of completion however the additional tax may be payable.

First Time Buyer Relief

Relief from liability for SDLT is available to anyone buying their first property subject to the following conditions:

  • The property must be intended for use as the purchaser’s only or principal home;
  • The purchase price must be less than £625,000;
  • The purchaser must not have owned any other residential property (or a share in any other residential property), whether purchased, inherited or gifted, anywhere in the world;
  • Where there is more than one purchaser, all purchasers must qualify;

The relief was introduced in s41 the Finance Act 2018, though the purchase price cap has altered over time. Where the price is £425,000 or less there will be no SDLT to pay. 5% will be payable on any portion of the price between £425,000 and £6250,000, so that on a purchase at £625,000 the duty will be £10,000, being 5% of £200,000.

Unlike certain other transactions, the value of any other residential property owned or previously owned is irrelevant. Relief is not available to a person buying their first home, where they have previously owned an investment property and nor is it available where for example a child has acquired a share in a property owned by his or her parents, under a trust arrangement.

Non-UK Resident Surcharge

Any purchase of a residential property by a non-UK resident, where the purchase price is £40,000 or more, now attracts a surcharge of 2% of the total purchase price. The charge was introduced in the Finance Act 2021 and is detailed in Schedule 16 of that act.

Meaning of “non-UK resident”

A person in “non-resident” if he or she has been absent from the UK for 183 days or more during the 365 days ending with the day of completion. There is an exemption for Crown employees serving abroad, such as members of the armed forces, or diplomats, together with their spouses or civil partners (provided they are living together).

A UK registered company, whose directors and / or shareholders are not UK resident, is a non-resident liable for the surcharge, as is any foreign corporation.

Refunds of Non-UK resident surcharge after completion

If on completion a purchaser is non-UK resident, but is then in the UK for 183 days or more of the 365 days following completion, he or she is entitled to apply for a refund of the surcharge payment.

Group Relief

This is potentially available where property is being transferred between companies which are part of the same group. It is detailed in Schedule 7 of the Finance Act 2003. In order to qualify:

  • The buyer company must be a subsidiary of the seller company; or
  • The seller company must be a subsidiary of the buyer company; or
  • Both companies must be subsidiaries of a third company

In order for a company to be a “subsidiary company”, at least 75% of its shares must be owned by the parent company. Note that the parent company itself must hold the shares as opposed to the directors in their personal capacity. Furthermore, the company must remain a subsidiary for at least 3 years following completion.

Housebuilders Acquiring Property in Part Exchange

Where a company which is in the business of building new dwellings or converting buildings or parts of buildings for use as dwellings acquires a property in part exchange, it will be exempt from SDLT provided that:

  • The seller is purchasing a new property from the builder;
  • The acquisition by the builder is conditional on the seller purchasing the new property;
  • The property was at some point in the two years prior to completion the seller’s only or principal residence; and
  • The new property is intended to become the seller’s only or principal residence

Note that the purchase of the new build property will attract SDLT at the usual rates – relief is only available for the builder, in respect of the property taken in part exchange.

Mixed Use Property

Some purchases will involve the acquisition of property which is part residential and part non-residential. Take for example a working farm, which includes a farmhouse, or perhaps a building which contains a flat on the first floor and shop on the ground floor.

If there is non-residential element then the non-residential rates of SDLT should be applied to the whole transaction. The major advantage to purchasers here is that if the higher rate additional dwelling surcharge would have applied, it will not. Care should be taken though – the non-residential element must be genuine and not contrived – there has been lots of case law, some of it apparently conflicting, on what does and does not constitute non-residential property. For example land attached to the dwelling, if used for recreation, is likely to be treated as ancillary to the dwelling and thus residential even if it is very extensive.

Multiple Dwelling Relief

Where two or more residential dwellings are purchased in a single transaction or as part of a single arrangement from the same seller, the purchaser is generally able to claim “multiple dwelling relief”. This is a partial relief. It does not have to be claimed but will often result in a lower tax bill.

To calculate the liability which results from an MDR claim, divide the total price paid for all of the properties by the number of properties then work out the tax on the result and multiply by the number of properties. For example if there are 3 properties, being purchased for £100,000, £200,000 and £300,000 respectively, the total price of £600,000 would be divided by 3. The tax on the result would be £6,000 (3% of £200,000) which is then multiplied by 3 so the total tax payable is £18,000. Compare that to the tax on £600,000 of £35,500 (3% of £600,000 then 0% on £250,000 and 5% on the next £350,000).

Linked Transactions

You may be wondering why, in the example above, we have calculated the tax on a single purchase at £600,000, rather than treating each property individually (which would result in a total bill of £20,500). It’s because, when two or more properties are purchased as part of a single arrangement, with same seller and buyer, HMRC treats them as linked and you are required to calculate the stamp duty based on the total price paid for all the properties. Note that for these purposes, where there are different sellers and buyers but all the sellers and / or all the buyers are connected, they are treated as being the same, so that if a married couple each buy a property from the same seller and both purchases completed on the same day, they are likely to be treated as linked purchases even though there are two different buyers.

Higher Rate Surcharge

It should be borne in mind then whenever multiple properties are purchased as part of a single transaction, the higher rate will be payable on the whole transaction, whether or not MDR is claimed. This is so even if at the outset the purchaser doesn’t own any other properties.

Staggered Completion Dates

All of the purchases do not have to complete on the same day for multiple dwelling relief to be claimed (or for the surcharge to be payable or for the transactions to be treated as linked). If the completion dates are staggered, SDLT should initially be paid on the first transactions(s) as though it is/they are independent of any others forming part of the arrangement. As future transactions complete, amended returns will need to be submitted (or the existing returns will need to be amended by agreement with HMRC) and any additional tax paid/rebates claimed. Keep in mind however that there may be an issue in respect of any transaction which completes more than 12 months after the first.

Special Rules for Granny Annexes

If a property has within its grounds (whether in a separate building or physically connected to the main property) an annexe, often referred to as a granny annexe, which is capable of being used as an independent dwelling, it may be possible to claim multiple dwelling relief and furthermore the additional dwelling surcharge can sometimes be avoided.

In order qualify as an independent dwelling the annexe must have:

  • its own sleeping quarters;
  • its own cooking facilities;
  • a toilet and other sanitary facilities;
  • independently controlled space heating; and
  • its own access from the exterior (so that it isn’t necessary to enter the main dwelling to access the annexe).

Although not a specified in any statute or (at the time of writing) in any decided cases, a good rule of thumb is consider whether the property could be let to tenants as is (ignoring any EPC, electrical inspection condition report or gas safety certificate that may be lacking). If yes, then the annexe probably constitutes and separate dwelling, so that MDR can be claimed.

Whether or not the additional dwelling surcharge will apply then depends on whether the annexe (or all of them, if more than one) is/are subsidiary to the main dwelling, which in turn depends on what proportion of the total purchase price is attributable, on a just and reasonable basis, to the annexe. If the value of the annexe (or if there is more than one, all of them) is equal to or less than 1/3rd of the value of the property as a whole, or put another way, if 2/3rd of the purchase price can be attributed to the main dwelling, then the surcharge will not be payable (unless the purchaser would be liable anyway to pay it).

The same rules apply as to any other MDR claim – take the total purchase price, divide by the total number of dwellings, work out the SDLT on that figure and multiply by the number of dwellings, save that if the result is less than 1% of the total purchase price, there is a minimum charge of 1%.

Note that it does not matter whether the annexe is actually used as a separate dwelling, merely whether it is capable of being so used.

Properties Purchased from Deceased Estates by Property Traders

Full relief from SDLT is available where a property is being purchased by someone whose business model involves buying properties from deceased estates and “flipping them” (selling them on, usually quite quickly for a profit), subject to strict rules:

  • all proprietors of the property must be deceased;
  • the proprietors must have occupied the property as their only or principal home at some point in the 2 years prior to their death;
  • neither the purchaser nor any person connected with the purchaser can live in the property;
  • the purchaser cannot let the property or permit it to be let;
  • the purchaser must not spend more than the prescribed maximum on refurbishments – this is currently £5,000 (though certain works such as works necessary to make the property safe do not count towards this limit).

Six or More Properties Purchased in a Single Transaction

Where 6 or more dwellings are purchased in a single transaction, the purchaser has the option to apply the residential rates (and claim multiple dwelling relief) or to apply the non-residential rates. The purchaser should of course choose the option that results in the lowest tax bill. For the avoidance of doubt, where the non-residential rates are applied, an MDR claim cannot be made.

Transactions in Connection with Divorce

Transfers of property between one party to a marriage or civil partnership and another are fully exempt from SDLT if they are made “in connection with divorce or the dissolution of a civil partnership”. The definition of “in connection with divorce” is contained in Schedule 3 paragraph 3 Finance Act 2003. It includes cases where a court order dissolving the marriage has been issued, but includes the following catch all provision: “at any time in pursuance of an agreement of the parties made in contemplation or otherwise in connection with the dissolution or annulment of the marriage, their judicial separation or the making of a separation order in respect of them”.

The agreement does not need to be in writing or involve the Courts or even solicitors. It must simply be the genuine intention of the parties to divorce and to divide up the assets of the marriage as a result.

Paragraph 3A mirrors paragraph in relation to civil partnerships.

Transfers Between Spouses and Civil Partners

If two people are married or in a civil partnership and buy property from each other, whether or not the purchaser already owns a share in the property and whether or not it is the purchaser’s home, the higher rate surcharge does not apply, so long as they are “living together” for the purposes of s1116 of the Corporation Tax Act 2010. This does not require them to actually live in the same house but rather, they are living together unless they are separated in circumstances likely to become permanent, so that they are living as though they are no longer a couple (but see “Transactions in Connection with Divorce”). SDLT will still payable at the standard rate.

Uninhabitable Property

If a “residential property” has deteriorated to such an extent that it is no longer suitable for use as a dwelling, then the non-residential rates of SDLT should be applied, so that the higher rate surcharge would not be payable. There appears to be some confusion however as to the extent of deterioration necessary, possibly not helped by the number “ambulance chaser” style firms that will try and encourage purchasers to try their luck – for a substantial fee of course.

The reality is that if a property has been a dwelling in the past, and the building is still substantially intact, it will be very hard to show that it should be classed as non-residential. Firstly, people tend to look at whether a property is "habitable" but actually the test is "is it capable of being used as a dwelling?". The difference may seem subtle, but it is important. A good illustration of this is Mudan v HMRC 2023 which is a useful case to quote. You should read the article for yourself, but the gist is that the property required substantial and quite expensive work to make it habitable, including a new roof, boiler and rewiring as well as extensive professional cleaning. nonetheless the Judge in that case said ‘I consider that a building which was recently used as a dwelling, has not in the interim been adapted for another use and is capable of being used [as a dwelling] again will count as a dwelling, even though it is not ready for immediate occupation, unless the reason [for this is] so fundamental that the work required to put these problems right goes beyond anything that might ordinarily be described as repair, renovation or fixing things’.

Here we highlight the key points:

  • It has been used as a dwelling recently and hasn't since been deliberately adapted for use as something else;
  • It is capable of being used as a dwelling again (wouldn't apply necessarily to a dangerous structure which had to be torn down);
  • It doesn't matter that it isn't ready for immediate occupation; and
  • The works required whilst extensive, were works that the owner of a dwelling might expect to have to carry out from time to time.

Contrast this case with PN Bewley Limited v HMRC. In Bewley, the taxpayer won by successfully arguing that due to the presence of asbestos the property (which he had purchased with the intention of demolishing it) was "unviable as a renovation or refurbishment".

HMRC's guidance (which admittedly doesn't carry any legal authority) differentiates between works of a structural nature and ordinary repairs. It makes clear for example that the absence of a bathroom does not prevent the property from being a dwelling, as a bathroom can and often will be removed and replaced during a home's life.

In summary, if the property has previously been used as a dwelling and it is capable of being renovated (and it is commercially viable to do so), it will probably not qualify as non-residential.

Section 53 of the Finance Act 2003 – the “deemed market value rule”

The general rule is that the consideration for SDLT purposes is the sum, in money or money’s worth, that actually passes between buyer and seller. One important exception however applies where the purchaser is a limited company or LLP and one or more of the sellers is a connected company or individual (such as a director/member, or a relative, spouse or civil partner of a director/member or a company with shareholders in common with the purchaser). Here, the consideration is deemed, in accordance with s53 Finance Act 2003, to be “not less than the market value of the subject matter of the transaction” (if the actual consideration is greater than market value, it is the actual consideration that duty is based on).

The “subject matter of the transaction” is the property, so if there is no or reduced consideration passing, SDLT is payable based on the value of the property. Of course, all purchases by limited companies and LLPs are subject to the 3% higher rate surcharge.

Forms of Non-cash Consideration for SDLT Purposes

In most cases, the “consideration” paid in respect of a transaction is the cash that passes from the buyer to the seller, but it can take a number of other forms. Some examples are:

  • An assumption of debt;
  • Grant of a security;
  • Shares;
  • Land; or
  • Other non-cash assets such as a car or a painting;

Essentially, the purchase price is any money or thing of money’s worth that passes from the buyer to the seller. The most common occurrences of non-cash consideration forming part of the purchase price are in “transfer of equity” which are transfers which result in at least one of the original owners remaining on the title, where there is a mortgage, as the incoming/remaining owner is deemed to have assumed a share of the mortgage debt, and transfers from the personal name of an owner of a company, to that company, where the “seller” receives additional shares in the company in return for the property.

There are however any number of other possible situations and the point to consider is, “can whatever benefit the seller has received from the buyer be quantified in cash terms and if so what is the cash value?”.

Linked Transactions

Where two or more properties are purchased as part of a scheme of transactions, they may be classed as “linked” for SDLT purposes, in which case they must be treated as a single transaction with SDLT being assessed on the total price paid for all of the properties, rather than being assessed individually. This will, in the absence of any relief being claimed, lead to a high tax bill.

To be treated as linked:

  • the seller must be the same person or entity in each case (or all sellers must be “connected persons” within the meaning given by s1122 of the Corporation Tax Act 2010;
  • the buyer must be the same person or entity in each case, or else they must be connected persons; and
  • the transactions must be part of a “single scheme, arrangement or series of transactions”.

The first two points are simply a matter of fact. The third will depend on the specific circumstances. If a single contract and/or transfer deed is used, then it is likely the transactions re linked. Essentially though, the question to ask is “would all of the transactions have proceeded on the same terms even if the others had not taken place?”. If the answer is no, they are linked. By way of an example, suppose a developer has built 4 new houses which are marketed at £150,000 each, and an investor approached him and offers £550,000 for all 4 – a discount of £50,000 on the asking price. He wants to buy one now, for £137,500 and the remaining ones in the next 12 – 24 months, each for the same price. The developer agrees, but only if the investor agrees to a clause in the contract for property 1 that says he must, within a defined period of time, buy the remaining 3 at the same price. These transactions would be part of a scheme, and so linked.

Contrast this with a situation where the same investor decides to buy another property from another developer. It is marketed at £175,000 but he negotiates a price of £165,000 and proceeds to complete. A few months later, he notices that the last property on the site still hasn’t sold, so he makes the developer a low offer of £150,000, which he accepts. These are not linked transactions. They have the same buyer an seller, but the first purchase was not carried out in contemplation of the second.

Where transactions are linked, it will usually be possible to claim multiple dwelling relief or if there are 6 or more dwellings, to apply the non-residential rates) and so reduce the tax burden. One exception to this is where a buyer attempts to purchase what is a single property in different parts – the house for £X and the garden for £Y for example. These transactions are clearly linked, but as there is only one dwelling, there can be no claim for multiple dwelling relief and there is no option of using the non-residential rates.

Annual Tax on Enveloped Dwellings (ATED

ATED is not related to SDLT, but as a property tax we’ve decided to mention it briefly here. It applies to properties owned by companies in the UK worth at least £500,000.

The tax has to be paid each year whilst the property is owned, but there is an exemption that applies where the property is let to a third party on a commercial basis, so that buy to let properties are generally exempt.

Partnership Incorporation Relief

The basic rule when a company purchases a property from its directors/shareholders is that it is liable to pay SDLT based on the higher of the market value of the property or the actual purchase price.

If prior to the transfer however, the owners of the property were operating a property rental partnership business, and the property in question was part of that business, it may be that the transaction is exempt from SDLT. The rules to be satisfied can be complex, and specialist advice should be sought. There are three basic elements:

  • There must be a partnership;
  • The partners must be operating a property rental business; and
  • The partners must all be shareholders of the purchasing company (or be “connected persons” in respect of the shareholders – see “Linked Transactions”) in the same proportions as they hold the equity immediately prior to the transfer.

Partnership – as you might imagine, there has to be at least 2 owners in order for a partnership to exist. A single individual cannot be in partnership with himself. All of the individuals don’t necessarily need to be on the legal title, as what’s really relevant is the equity, so that a single individual could hold the property on trust for one or more others. In this case though there should be some documentary evidence, in the form of a declaration of trust for example. Beware that creating a partnership, by transferring the property (or equity) from a sole name into joint names immediately prior to transferring it to the company may well fall foul of the General Anti Avoidance Rule (GAAR) where it appears that the sole purpose of creating the partnership was to avoid the SDLT that would otherwise arise.

Property Rental Business – the partnership must be operating a property rental business as opposed to holding passive investments. The mere fact the property is let on commercial terms is not enough to satisfy this requirement. The partners must spend a significant amount of time, the current consensus is around 20 hours per week, actively managing the portfolio. The activities that count toward this are things like finding tenants, arranging repairs, collecting rents, pursuing arrears etc. Essentially, the work done by the partners should have the character of a job, albeit it doesn’t have to be a full time job. If the partners are “hands off” and simply instruct a managing agent to deal with everything, it is likely that the partnership properties will be treated as passive investments. Whilst there is no set number of properties a partnership must have for it to constitute a business, it is clear that the ownership of a single property, let to a single individual or family, will not generate enough work to satisfy the circa 20 hours per week requirement and that a number of properties would be required. Houses in Multiple Occupation generally need more managing that single dwellings.

Partners to be shareholders – strictly, only one of the partners needs to be a shareholder in the limited company, in order to be entitled to a partial exemption, but for the bill to be £0, there has to be no change in the ultimate beneficial ownership. This will be the case if A and B own a property in their personal names in equal shares before the transfer to the company, and own the company in equal shares. They still each own an equal share of the equity, just via a different vehicle. They have neither gained nor lost any equity.

Calculating the consideration for SDLT purposes

Partnership incorporation “relief” (it isn’t strictly a relief, which will be explained) is based Schedule 15 of the Finance Act 2003, which contains special provisions relating to transfers of property into and out of partnerships, in particular paragraph 18. This contains a formula which is used to calculate the “sum of the lower proportions (“SLP”)”. It is a fairly complex formula, which produces a number between 0 and 100. This is then used to calculate the chargeable consideration for SDLT purposes, as follows: “chargeable consideration = market value * (100 – SLP)%”.

Where the partners own the same shares in the company as they do in the property’s equity, the SLP will be 100, so that the chargeable consideration will be £0 (100 – 100 is 0, and 0% of any number is of course 0). If for example the property is owned by two partners in equal shares, but one of the partners owns all of the shares in the company, then unless the two of them are “connected persons”, the SLP will be 50 – because the partner who owns shares in the company has gained 50% of the equity in the property. In that case, the chargeable consideration will be 50% of the market value (market value * (100 – 50)%, or market value * 50%).

If the partners are “connected” for the purposes of s1122 Corporation Tax Act 2010 (see “Linked Transactions”) and one of the partners owns all of the shares in the company, the SLP will be 100, as though they owned the company in equal shares.

If the chargeable consideration is £0 then the transaction is exempt from the requirement to submit a return or to pay duty by virtue of paragraph 1 Schedule 3 Finance Act 2003.

Completing the transfer deed and dealing with the absence an SDLT5 certificate

The price will generally be recorded in panel 8 of the TR1 by checking the third box (Other) and completing it as follows “Firstly the outstanding mortgage debt due under the mortgage dated XXXX in favour XXXX in the sum of £X and secondly shares in the transferee to the value of £Y”, or some variation thereof, the principle being that the “sellers”, i.e. the current registered proprietors are released from the existing mortgage debt, if there is a mortgage and also receive shares in the buyer company in return for the remaining equity. X and Y should together equal the market value of the property.

Panel 11 of the TR1 will need to include an explanation as to why no SDLT return has been submitted, such as “This transfer, being a transfer from a partnership to a limited company, is one to which the provisions of paragraph 18 schedule 15 of the Finance Act 2003 apply and for the purposes of paragraph 18 the sum of the lower proportions is 100 so that the chargeable consideration is £0. Accordingly the transaction is exempt from the requirement to submit an SDLT return by virtue of paragraph 77A(1) Finance Act 2003.”

A written explanation similar to the contents of panel 11 will need to be provided to HMLR in lieu of the SDLT5 certificate.

Sale and Leaseback Relief

It was established in the case of Rye v Rye that on cannot grant a lease directly to oneself. This causes a problem where a person or entity owns, for example, a block of flats and wants to create leases of the individual flats so as to mortgage them separately to the whole building. The solution is to transfer the freehold to another person or entity (whether jointly with or separately to the original owner) so that a lease can be granted in favour of the original owner. In that scenario, should any SDLT be payable on the grant of the lease, full relief can be claimed (but a return must be submitted).

Transfers of Equity

”Transfer of Equity” is a conveyancers’ term for a transfer which results in at least one of the original proprietors remaining on the title, with one or more owners being added to or removed from the title. The SDLT calculation is usually based on:

  • any money paid by an incoming/remaining owner; and
  • the proportion of any mortgage debt assumed by the remaining/incoming owner.

For SDLT purposes, only a person being added to the title, or else acquiring a greater share of the equity, is a purchaser and only a person being removed from the title, or else ending up with a lesser share of the equity, is a seller.

The total consideration is taken to be the amount of any cash paid by the buyer to the seller plus a share of any existing mortgage debt secured by way of a charge on the property on completion which is directly proportional to the share of the equity acquired by the purchaser(s) (subject to a caveat that if the result is greater than the market value of the acquired share but would not but for the mortgage debt assumed, them the amount of assumed debt is reduced so that the consideration equals the market value of the acquired share). As with a purchase from an unconnected party, the higher rate additional property surcharge will apply if any of the purchasers own another property subject to the following exceptions:

  • Acquisition of a further share in only or principal home - where a person owns a property jointly with another (or others) and acquires a further share, this would normally give rise to a liability to pay the higher rate surcharge (additional 3%) if the person also owned other properties. There is an exemption however where the property is already the purchaser’s only or principal home. Here, only the standard rate SDLT is payable;
  • Transfers between spouses/civil partners – any transfer where the seller and purchaser are married to or in a civil partnership with each other and living together for the purposes of s1116 of the Corporation Tax Act 2010 cannot be a higher rate transaction; and
  • Transfers in connection with divorce – any transaction between spouses or civil partners which is made pursuant to a court order in connection or otherwise in contemplation of a divorce or judicial separation is exempt from SDLT altogether. Note though that if one of the purchasers is a third party not connection to the divorce, for example where the current owners are the married couple and the new owners will be one of the couple plus that person’s new partner, or perhaps a parent who is joining in to help with mortgage affordability, then the exemption will not apply.