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Unlocking the Benefits of Sale and Leaseback Relief

Published by Simran Baniya
Posted Date: June 19, 2024 , Modified Date: July 2, 2024
Categories: Tax Relief

A sale and Leaseback arrangement is when a company sells an asset and then leases it back from the purchaser. In this transaction, the seller becomes the lessee, and the buyer becomes the lessor. Typically, this involves buildings but can also include other large assets. This arrangement allows the seller to continue using the asset while transferring ownership to an investor.

A typical example would be where Party A transfers or grants a major interest in land to Part B (the sale). Out of that interest, Party B grants a lease back to Party A (the leaseback).

Purpose of Sale and Leaseback

A sale and leaseback agreement allows a seller to release equity to fund another property purchase and help a business in financial difficulty with a quick release of equity.

  • Separating Assets from Operations: When a company wants to separate its assets from its operating business. Retaining ownership of commercial property can be seen as diversifying away from the core business goals.
  • Releasing Equity: To release equity, either to fund the purchase of another property or to reinvest and encourage growth in other areas of the business.
  • Financial Relief: To help a business in financial difficulty that requires a quick release of equity.
  • Continued Use of Assets: When the business wants to continue using a vital asset without owning it, thus improving cash flow or reducing debt.

As this transaction is an exchange, both the sale and leaseback parts are chargeable on the greater of:

  • The market value of the interests transferred.
  • The consideration given.

Grant of Relief

Relief ensures that only the transfer of the original freehold interest in the property is chargeable to SDLT (Stamp Duty Land Tax). This relief applies to a ‘sale and leaseback arrangement’ and fully relieves the leaseback only. The sale remains chargeable and falls within the market value for exchanges. This relief is not automatic and must be claimed by completing the land transaction return.

Grant of Relief - Sale and leaseback relief

The relief is also available for a transaction involving:

  • The grant of a lease followed by an underlease back or
  • The assignment of a lease in consideration of a leaseback.

Multiple sales can be made in return for one leaseback and still qualify for relief. The leaseback transaction is exempt from SDLT if qualifying conditions are met:

  • The sale transaction is wholly or partly in consideration of the leaseback transaction, and the only other consideration for the sale is money or the assumption, satisfaction, or release of a debt.
  • The interest leased back must be an interest out of the original interest.
  • The sale is not a pre-completion transaction under the meaning of pre-completion transactions of contracts as per FA 2003.
  • If both parties are corporate bodies, they must not be members of the same group for the purpose of group relief at the effective date of the leaseback transaction. (While sale and leaseback relief may not be available, the consideration for group relief may be satisfied for both elements of the transaction)

Rates of SDLT

The chargeable SDLT rates in respect of land transactions are as follows:

Table A (Residential Property)

Relevant Consideration

SDLT Rates

Higher SDLT Rates

Up to £250,000

0%

3%

£250,001- £925,000

5%

8%

£925,001- £1,500,000

10%

13%

£1,500,000 +

12%

15%

Table A includes an additional 3% surcharge for certain acquisitions of additional properties purchased by companies. If the relevant land includes non-residential property, then the rates in Table B apply.

Table B (Non-Residential Property)

Relevant Consideration

SDLT Rates

Up to £150,000

0%

£150,001 - £250,000

2%

£250,001+

5%

For land transactions entered wholly or partly in consideration of another land transaction, each transaction is taxed separately. Special rules determine the chargeable consideration. Regardless of whether relief for the leaseback is claimed, the chargeable consideration for each leg is determined by the exchange rules. The chargeable consideration for the sale leg depends on whether there was a written agreement at the time of the sale for the leaseback leg to be entered into.

Conclusion

A sale and leaseback arrangement can be a strategic financial tool for companies looking to release equity, improve cash flow, or separate their assets from their operating business. It allows businesses to continue using essential assets without the burden of ownership, providing flexibility and potential for reinvestment in other areas.

This approach is especially beneficial for companies needing quick financial relief or seeking to align their asset management with their core business goals. By carefully considering the timing and structuring of such transactions, businesses can effectively leverage the advantages of sale and leaseback agreements.

Need more expert advice on sale and leaseback reliefs?

Contact us today for efficient and
hassle-free assistance.

Simran Baniya
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