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SDLT is full of complexities but some issues crop up more frequently than others. Here we discuss a number of points which are commonly seen in relation commercial property development.
Licences – sale at the direction of the developer
A licence is normally exempt from SDLT, however, when a developer agrees to develop and market a property under a licence, they may be subject to SDLT in respect of the licence arrangement in circumstances where it is entitled to direct the conveyance of the completed plots to the final purchasers.
The arrangement can potentially be structured so that the developer does not have this right of direction, but this has to suit the commercial deal and be balanced with the developer’s need for security and control over the sales.
If a developer provides construction works as consideration for any land, the value of those works may be subject to SDLT.
Development arrangements can be complex and one of the first things to consider is whether any works being carried out are in ‘consideration’ for any land interest or whether they are being carried out for another reason or for other consideration. This can be particularly important to consider if there are a number of parties and transactions involved in the arrangements, where it can be tricky to establish who is doing what and for whom.
There is a relevant exemption from SDLT for construction works. This exemption applies if:
- Works are carried out after the effective date of the transaction
- The works are to be carried out on land acquired under the transaction or other land held by the buyer
- It is not a condition of the transaction that the works are carried out by the seller
For the purposes of the first condition, the effective date is the earlier of completion or ‘substantial performance’ of the contract. Substantial performance includes taking possession of the whole or substantially the whole of the property in question, which will often occur when the development starts. If the contract provides for the development and completion in stages, establishing the effective date for this purpose can be more difficult.
Prudential Assurance Co v CIR principles
When the seller is carrying out works on land which will be acquired by the buyer, CIR principles apply. The question is whether the buyer is purchasing land (subject to SDLT) and paying for the development separately (not subject to SDLT) or purchasing a completed building (bringing the cost of both the land and development into the charge of SDLT).
Under the principles in Prudential, so long as the agreement to undertake works is separate from the property agreement, and capable of being separately enforced, the subject matter chargeable to SDLT will be taken to be the land in its condition at the date of the transfer (so that if completion occurs before any development has started, SDLT will be payable on the undeveloped land and not on any construction costs).
However, in some cases, the contract for the sale of the land and the development contract may be so intertwined that the whole of the consideration is subject to SDLT, such as where an event of default under the works agreement provides that the land reverts to the seller.
A land exchange occurs where a buyer enters into one land transaction wholly or partly in consideration of entering into another transaction as seller.
If the exchange includes the acquisition of a major interest in land (broadly a freehold or leasehold property) by at least one of the parties, the rules state that both parties must pay SDLT on the greater of:
- The market value of the interest acquired
- The consideration given
In theory, this means that if the land values are unequal both sides will pay SDLT on the largest amount (e.g. if one side is worth £500,000 and the other worth £1M, both sides pay SDLT on £1M). In commercial arrangements it would be unusual for one party to be getting something for nothing and there may be other forms of consideration in the mix.
HMRC’s guidance on this point provides that an apportionment is possible between different types of consideration (with some potentially not subject to SDLT) but the application is complex and made more so if there are more than two parties involved.