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SDLT: Navigating Sub-sale Relief and Other Transfer of Rights

Published by UK Property Accountants
Posted Date: June 11, 2024 , Modified Date: June 13, 2024

In the realm of Stamp Duty Land Tax (SDLT), sub-sale relief, as outlined in Section 45 of the Finance Act 2003 and its associated Schedule 2A, holds considerable legal significance in transactions occurring prior to property sales finalisation.

SDLT relief on pre-completion transactions, commonly known as sub-sale relief, is available to the ultimate transferor of such transactions. These statutory provisions, specifically detailed within paragraphs 15-18 of Schedule 2A of the Finance Act 2003, provide crucial relief mechanisms for ultimate transferor of land transactions, offering full relief under specific conditions. To qualify, the transaction must either be an assignment of rights or a sub-sale.

Before we delve into the specifics of sub-sale relief, let us first understand the intricacies of the transactions where such relief maybe available and their legal ramifications.

Understanding Pre-Completion Transactions

Pre-completion transactions occur before the substantial performance or completion of the original contract for property conveyance. Put simply, they involve additional agreements related to property conveyance before the primary contract is finalised.

Types of Pre-Completion Transactions

Types of Pre-Completion Transactions:

1. Assignment: This involves the purchaser under the original contract assigning their rights to another party. For instance, if A sells to B, and B then assigns their rights to C, it constitutes an assignment. It's important to note that while rights can be assigned, contractual obligations cannot be transferred.

2. Sub-sale: In a sub-sale, A contracts to sell to B, who then contracts to sell to Party C.

  • True Sub-sale: Here, B can instruct Party A to transfer the property directly to Party C, unless prohibited by the A to B contract.
  • Back-to-Back Sub-sale: B completes the purchase from A and immediately sells to C, often done simultaneously.

3. Novation: Novation occurs when parties to the original contract agree to replace one party with another. This typically involves a tripartite contract, cancelling the original contract and establishing a new one between the original seller and the new buyer.

Compliance Procedures

In typical scenarios, except in cases of novation, sub-sale (pre-completion) relief must be sought by the original purchaser, B, either through inclusion in their land transaction return or by submitting an amendment to it.

For Example, 

To illustrate the application of these rules to an assignment of rights scenario:

  • Initially, A enters into a sale and purchase agreement with B for land, with a consideration of Β£1 million to be paid upon completion.
  • Subsequently, B assigns its rights under the contract to C in exchange for a payment of Β£100,000.
  • C then completes the acquisition by paying A the agreed-upon Β£1 million.

The desired outcome here is that B should file a land transaction return for a transaction with consideration of Β£1 million, with the inclusion of a claim for full relief. Conversely, C should file a land transaction return reflecting a consideration of Β£1.1 million, accounting for the additional payment made for the assignment.

Novation, however, operates differently within pre-completion transactions.

In cases of novation:

  • B does not acquire the property and is not deemed to do so.
  • Consequently, B is exempt from SDLT based on general principles rather than a specific exemption, negating the need for B to submit a return or claim an exemption.

What Happens if SDLT Has Already Been Paid, and Then a Novation Occurs?

A significant advantage of novation arises when B has substantially performed their obligations. In such instances, where the contract between A and B is annulled rather than executed, B becomes eligible to claim a refund of SDLT paid, as outlined in Section 44(9) of the Finance Act 2003.

Minimum Consideration Rule

This rule is crucial in pre-completion transactions, especially when the parties are connected or not acting at arm's length. Under this rule, if connected parties are involved, the SDLT liability is based on the higher price payable by the parties.

Minimum Consideration Rule

If B and C are connected, or are not acting at arm’s length, then, while B is ordinarily still entitled to his exemption then C may have to pay SDLT based on the price B pays, instead of the price C pays. This applies even if B and C are not related and are dealing fairly with each other. Whether another party, A, is connected or not is irrelevant in this situation.

Let's simplify it:

  • A is selling land to B for Β£1.5 million. Before the deal is done, B decides to sell the land to C for Β£1.2 million.
  • B and C are siblings. In such circumstances, while B will still be entitled to relief, SDLT for C will be based on the higher price of Β£1.5 million.

Conclusion

SDLT sub-sale relief presents a valuable opportunity for property buyers to lessen their SDLT liability during sub-sale transactions. However, it's crucial to structure transactions correctly to qualify for this relief, particularly by carefully timing substantial performance of a contract. Solicitors and tax advisers should be engaged from the outset to navigate potential pitfalls.

Taxpayers must exercise caution when making claims aimed at exploiting sub-sale relief. In the recent years, various schemes have emerged primarily to exploit SDLT sub-sale relief. HMRC has effectively contested these schemes, often resulting in relief being denied or withdrawn.

Remember, if an opportunity seems too good to be true, it likely is!

Need expert advice on Sub-sale reliefs and other transfer of rights?

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