SDLT on shared ownership transactions

8 Jun 2017News

David Keighley sets out an overview of the different aspects to take into account when advising on shared ownership transactions

The calculation and impact of stamp duty land tax (SDLT) on a shared ownership transaction can be complex. In particular, uncertainty can arise when acting on the grant of a new lease or on a staircasing purchase. The issues to consider differ as between the grant of a lease, the assignment of an existing lease, and the purchase of additional shares by way of staircasing.

Grant of a lease

Making a market value election:

On entering into a shared ownership lease, the original purchaser has the option to make a market value election (MVE). If this election is made, then on the grant of the lease SDLT is paid on the value of the 100 per cent interest, not the share purchased. The normal SDLT thresholds apply. The potential advantage in making an MVE is that no further SDLT will be payable if the original purchaser or a subsequent owner acquires further equity by way of staircasing.

An MVE is made in the SDLT1 return and cannot be revoked once made. However, if the SDLT1 does not incorporate an MVE, it is possible to make one within 12 months of the original return.

The making of an MVE must also be recorded within the lease. This is done by including in the lease a clause in the form envisaged by clause 9 of the current model shared ownership lease of a flat and clause 7 of the current lease of a house.

The intention behind the clause is that its inclusion signifies that an MVE was made on the granting of the lease. It follows therefore that the clause should be removed from the draft lease if an MVE is not being made. One significant issue which can arise by proceeding in that way is that the absence of the clause is often the only evidence that an MVE was not made. This is unsatisfactory, and if an MVE is not being made then a positive statement to that effect should be included within the lease.

Not making a market value election:

If the first purchaser does not wish to make an MVE, then SDLT will be payable both on the price being paid for the share being acquired and the net present value of the initial rent payable measured over the full term of the lease. The normal thresholds will apply.

It is possible that SDLT will be payable on the rent even if no SDLT is payable on the premium. The reason for this is that the rent payable on a shared ownership lease may itself be sufficiently high to attract SDLT. A calculation of the net present value will need to be carried out using the calculator on the GOV.UK website.

Assignment of a lease

On the assignment of a shared ownership lease, the question of whether an MVE was or was not made has no relevance to the SDLT payable on the assignment. The normal SDLT thresholds apply. The SDLT payable is calculated by reference to the price being paid on the assignment and not the full market value of the property.

Staircasing by the original purchaser

The 2014 Autumn Statement introduced a change which may affect the calculation of tax on staircasing when an MVE was not made. In some circumstances, staircasing may give rise to additional tax being payable on earlier linked transactions. The rules to be applied depend upon whether the lease was initially granted on or after 12 March 2008.

Staircasing up to 80 per cent:

Once the initial purchase has been made, there is no SDLT payable and no need to notify HMRC when a further share is acquired leading to the buyer holding less than 80 per cent of the equity. This applies regardless of whether an MVE was made.

Staircasing over 80 per cent if an MVE was made:

If an MVE was made at the time of the grant of the lease, then no SDLT is payable. This is regardless of the amount being paid for the share being acquired. Even if no tax is payable, a return must be lodged with HMRC.

Staircasing over 80 per cent if an MVE was not made:

Once the interest acquired exceeds 80 per cent, SDLT may be payable if an MVE was not made at the time of the grant of the lease. As mentioned previously, the calculation of any tax payable will differ according to the date on which the lease was originally granted.

The general principle is that the amount of tax payable on staircasing when an MVE was not made on the grant of a lease is based on the total amounts paid for the property up to and including the date on which the staircasing occurs. In essence, it is calculated by adding together all of the applicable linked transactions, and if the total exceeds the threshold then SDLT is payable. The tax payable is apportioned to reflect that it is the staircasing transaction that is taxable rather than the total price paid to that point.

Tax calculation (initial grant of the lease before 12 March 2008)

The calculation of tax in this scenario is best explained by the illustration below:

On 1 March 2008, a buyer pays £80,000 on a 50 per cent share in a property with a total market value of £160,000. No MVE is made on the grant of that lease.

The buyer later buys a further 25 per cent share in the property for £40,000, taking their ownership to 75 per cent. As the share owned at this stage is less than 80 per cent, this is not a notifiable transaction. On or after 4 December 2014, they buy the final 25 per cent, including the freehold, for £40,000 and become the outright owner of the property.

SDLT payable on the final staircasing is £175. This is based on the total consideration of £160,000, which at 0 per cent on £125,000 and 2 per cent on £35,000 would attract a liability of £700. However, this figure is apportioned 1:4 to reflect that the taxable staircasing payment is one-quarter of the total paid to that point. There will also be £800 retrospectively payable on the initial lease premium (because this is linked with the later transactions) and a further return will be required.

Additional tax calculation:

Because the lease was granted before 12 March 2008, tax on the £80,000 premium paid on the grant of the lease becomes due at the time of the final staircasing. This is because the date of the lease dictates that the transactions are linked for SDLT purposes. This tax is calculated under the rules which applied at the date on which the lease was granted, so the tax due is 1 per cent of £80,000.

The additional return required in respect of the further tax now payable on the premium paid on the grant is made not by a formal return but by writing to HMRC Birmingham Stamp Office. The letter '¨should specify:

The unique transaction reference number for each transaction already notified;
The amounts paid for each transaction;
A self-assessed calculation of the additional tax; and
Enclose payment of the additional tax.

Tax calculation (initial grant of the lease after 12 March 2008)

The calculation of tax in this scenario is best explained by the illustration below:

On 1 March 2012 a buyer pays £75,000 on a 25 per cent share in a property with a market value of £300,000. In December 2014 they increase the share in the property to '¨85 per cent at a cost of £180,000, and on '¨later dates pay £30,000 for a further '¨10 per cent share and £15,000 for the final '¨5 per cent share.

SDLT payable on the staircasing to 85 per cent is based on the total consideration to that point of £255,000, which at 0 per cent on £125,000, 2 per cent on £125,000, and 5 per cent on £5,000 would attract a tax liability '¨of £2,750. That is then apportioned 180:255 and results in an amount actually being payable of £1,941.

SDLT payable on the second staircasing to 95 per cent is £447 (total consideration of £285,000 at 0 per cent on £125,000, 2 per cent on £125,000, and 5 per cent on £35,000 comes to £4,250, apportioned 30:285). There is also an additional £743 retrospectively payable on the first staircasing and a further return will be required setting out the same information as mentioned previously.

SDLT on the final staircasing transaction is £250 (total consideration of £300,000 at 0 per cent on £125,000, 2 per cent on £125,000, and 5 per cent on £50,000 comes to £5,000, apportioned 15:300). An additional £316 is retrospectively payable on the first staircasing, and an additional £53 is also retrospectively payable on the second staircasing transaction. In each case yet further returns will be required on the same basis as mentioned previously.

No further tax is ever payable on the initial purchase premium as the date of the lease dictates that the initial grant is not treated '¨as a linked transaction.

Additional tax calculation:

At the time of the second and third staircasing transactions, the earlier transactions became liable to additional tax. '¨By way of illustration, the additional '¨£743 retrospectively payable on the first staircasing at the time of the second staircasing is calculated in the '¨following manner:

£180,000 (second price transaction) ÷ £285,000 (total paid after third transaction) x £4,250 (tax due on that '¨total consideration) = £2,684.
Tax due now on second transaction '¨= £2,684
Tax paid to date on second '¨transaction = £1,941
Additional tax to pay on second '¨transaction = £743.

Staircasing not by the original purchaser

General guidance in relation to SDLT on shared ownership transactions is available on the HMRC section of the GOV.UK website at www.gov.uk/sdlt-shared-ownership-property. This guidance, however, relates only to staircasing by the original buyer. Using the basic principles relating to linked transactions, some conclusions can be drawn in respect '¨of staircasing in these circumstances.

However, in the absence of formal '¨guidance having been published by HMRC, solicitors should seek specific guidance from the Stamp Office if it is thought that tax arises on a staircasing by someone other than the '¨original purchaser.

David Keighley is an expert in shared property transactions. He was a partner and head of residential property at Herrington Carmichael until his retirement, and now writes for publications, lectures, and presents webinars. He was the co-author of an online training course for the Law Society's Conveyancing Quality Scheme

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