Stamp duty land tax – overage on land

It is not uncommon for overage agreements to be placed on land, particularly where it is felt there could be development opportunities in future and the vendor does not wish to miss out if these come to fruition. But how does this impact on stamp duty payable by the purchaser and are there any opportunities or pitfalls?

When land or property is purchased, many people are aware that stamp duty land tax (SDLT) is due on chargeable consideration, which is in money or money’s worth. Care should be taken where there are any overage clauses to ensure the correct amount of SDLT is paid and to consider whether it would be advantageous to make an application for deferral.

For example, what happens if land is sold for £1m plus an extra £500,000 if planning permission for development is obtained? The £500,000 element is contingent and the amount is known. It can be uncertain if planning consent will be granted. SDLT would be due on the full £1.5m if no further action is taken. We would normally recommend that application for deferral of payment of SDLT is made on the £500,000 where the uncertainty is likely to last at least 6 months. There is a cashflow advantage of not having to pay SDLT on an element when it may never become due, but also protects the interest position.

In many cases we see, the overage is uncertain. If no deferral application is made the chargeable consideration is calculated to include a reasonable estimate of the final consideration with no discount for future value. There are again advantages with making a SDLT deferral application which is illustrated in the example below.

In 2015, a retiring farmer sells green belt land to another dairy farmer for £2m, imposing an overage clause. The clause includes that if, within the next 25 years, planning permission is granted for the development of land for any use other than agriculture, the dairy farmer will pay 30% of the uplift in value as overage.

• Fast forward to 2021 and the land is unexpectedly zoned for residential development, resulting in the arable farmer getting planning permission
• The overage land is now worth £20m, so £6m is payable to the retired farmer as overage
• SDLT is now due on £8m (being £2m + £6m overage) based on the rates applicable in 2015
• SDLT on the £6m element was due in 2015 so interest is charged on the additional tax, backdated to 2015
• If the dairy farmer had applied for deferral of overage, even of £0 of overage, as the development was thought to be so unlikely, interest would have been payable only from the date when payment of overage (and therefore the extra tax) is triggered

There are tight deadlines for making deferral applications for SDLT purposes, but these normally have significant cashflow benefits as well as protecting the interest position should any overage become payable in future.

We have an experienced SDLT advisory team who would be pleased to assist. Please get in touch if you have any queries.