SDLT Exemptions

SDLT Classifications, Reliefs and Exemptions)

Section Summary: This section outlines various SDLT exemptions that reduce or eliminate the tax on property transactions under specific conditions.

Key Points

  • Exemptions apply to inherited properties, property transfers during divorce, low-value properties, and transactions without financial consideration.
  • Specific criteria and scenarios define eligibility for these exemptions, aiming to ease financial burdens in particular situations.

Main Principles

  • SDLT exemptions are designed to support fairness and affordability in property transactions, recognising special circumstances like inheritance, divorce, and low-value ownerships.

Exemption. Inherited Property

(SDLT Classifications, Reliefs and Exemptions>SDLT Exemptions)

Inherited properties are exempt from Stamp Duty Land Tax (SDLT), but any property bought or sold after the inheritance is subject to standard SDLT rates.

This exemption applies to any property received as an inheritance, as outlined in a will, meaning that the beneficiary does not have to pay SDLT, a tax usually incurred when purchasing property. It’s important to note, however, that this exemption strictly applies to the act of inheritance. Should the beneficiary later decide to buy another property, standard SDLT rates will then apply to that transaction.

General Principle

The core rule here is straightforward: any property acquired through inheritance, as specified in a will, is not subject to SDLT. This exemption is comprehensive, covering properties of any value.

Scenarios Illustrating SDLT Exemption

  • Direct Inheritance Example: Consider Emma, who inherits a house valued at £400,000 from her late aunt. In this case, Emma benefits from a complete SDLT exemption on her new property.
  • Joint Inheritance Example: When John and his sister become co-owners of their parents’ home, valued at £500,000, through inheritance, neither sibling is required to pay SDLT on their shares of the property.

The Impact of Subsequent Sales or Purchases

A key area of confusion often arises after the initial inheritance. If a beneficiary sells the inherited property and then purchases another, SDLT will be due on the new purchase. For instance, selling an inherited property to buy another for £300,000 means SDLT is calculated based on the £300,000, not the inherited property’s value.

Rental or Investment Properties

Even if the inherited property is used for rental or investment, the initial exemption from SDLT still stands. However, any future transactions involving this property will be subject to the usual SDLT considerations.

Specific Relief Provisions

For inherited properties, the SDLT rate is effectively 0%. This means if Alex inherits a property valued at £650,000, which would typically incur a substantial SDLT, he would owe nothing in SDLT due to the inheritance exemption.

Key Considerations for Beneficiaries of Inherited Property

  • Property Value: The exemption from SDLT applies regardless of the inherited property’s market value at the time of inheritance.
  • Multiple Beneficiaries: When a property is inherited by more than one person, each beneficiary’s share is exempt from SDLT.
  • Future Transactions: Beneficiaries should be mindful that any subsequent property transactions will be subject to standard SDLT rates and rules.

Conclusion

This exemption applies regardless of the property’s value and to each beneficiary’s share if multiple parties are involved. However, this exemption does not extend to future transactions. 

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Exemption. Property Transfers During Divorce or Dissolution of Civil Partnerships

(SDLT Classifications, Reliefs and Exemptions>SDLT Exemptions)

Property transfers between partners during a divorce or dissolution of a civil partnership are exempt from SDLT, but buying a new property post-divorce is subject to standard SDLT rates.

In the United Kingdom, the transfer of property between partners during a divorce or the dissolution of a civil partnership is exempt from Stamp Duty Land Tax (SDLT). This exemption is grounded in the understanding that such transfers are not typical market transactions but rather are necessitated by the legal process of ending a marriage or civil partnership.

Qualifying Transfer Example

  • Scenario: Sarah and John decide to divorce. As part of their divorce settlement, John agrees to transfer his share of their jointly owned home to Sarah.
  • SDLT Implication: This transfer is exempt from SDLT because it is an integral part of the divorce proceedings, allowing Sarah to receive John’s share of the property without needing to pay SDLT.

Non-Qualifying Transfer Example

  • Scenario: Following the divorce, Sarah sells the house she received from John and buys a new property for £300,000.
  • SDLT Implication: This purchase does not qualify for the SDLT exemption as it is a separate transaction not directly related to the divorce settlement. Therefore, Sarah is required to pay SDLT on her new property according to the standard rates.

Common Misunderstandings About SDLT Exemption

Post-Divorce Transactions

A common area of confusion is the assumption that all transactions following a divorce are exempt from SDLT. The exemption specifically applies to direct transfers of property outlined in the divorce settlement.

Additional Property Purchases

Another misunderstanding arises with the purchase of additional properties after the divorce. These transactions are subject to the standard SDLT rates, as the exemption does not extend to new property acquisitions post-divorce.

Divorce or Dissolution of Civil Partnership Relief

  • Relief Code: This situation does not require a specific relief code because no SDLT return is necessary for property transfers that are part of a divorce or civil partnership dissolution.
  • SDLT Rate: The SDLT rate for these transfers is effectively 0%, reflecting the exemption for property transfers under these circumstances.

This overview highlights the importance of understanding the specific conditions under which SDLT exemptions apply, particularly in the context of divorce and civil partnership dissolution. It’s essential for individuals undergoing these processes to be aware of their obligations and the potential financial implications of property transfers and purchases.

Exemption. Low-Value Freehold and Leasehold Properties

(SDLT Classifications, Reliefs and Exemptions>SDLT Exemptions)

 

Purchases of freehold properties under £40,000 and certain low-value leasehold transactions are exempt from SDLT, but it’s important to consider annual rent in leaseholds and ensure the property price truly falls below the threshold.

HMRC’s SDLT Exemption Criteria:

  • Freehold Properties: No SDLT or filing requirement for freehold purchases below £40,000.
  • Leasehold Properties: Certain leasehold transactions are exempt if they fall below specific thresholds.

Scenarios and Examples:

Freehold Purchase:

  • Example of Exemption: Jane buys a small freehold property for £35,000. She is exempt from paying SDLT and does not need to file a return.
  • Example of Non-Exemption: Tom purchases a freehold property for £45,000. He must pay SDLT and file a return as the purchase price exceeds the £40,000 threshold.

Leasehold Transactions:

  • Low-Premium Leasehold: If a leasehold property is acquired with a low premium (initial payment) but with a rent above the SDLT threshold, SDLT might be due on the rent but not on the premium.
  • Example of Exemption: Sarah enters into a leasehold agreement with a premium of £30,000 and annual rent of £1,000. The premium is exempt from SDLT, but SDLT may be due on the rent.

Areas Where People Can Get Caught Out:

  • Misjudging the Threshold: Assuming exemption without verifying if the property’s purchase price or leasehold premium actually falls below the specified thresholds.
  • Overlooking Rent in Leaseholds: Failing to consider that SDLT might be due on the leasehold’s annual rent, even if the premium is below the threshold.

Applicable Stamp Duty Reliefs with Numbers:

  • Freehold Purchases Under £40,000:
    • SDLT Rate: 0%
    • Filing Requirement: None
  • Leasehold Transactions Below Threshold:
    • Premium SDLT Rate: 0% if under threshold
    • Rent SDLT Rate: Variable, depending on the annual rent amount

Examples of Stamp Duty Calculations:

  1. For a Freehold Purchase at £39,000:
    • SDLT Due: £0
    • Filing: Not required
  1. For a Leasehold with a £30,000 Premium and £1,000 Annual Rent:
    • SDLT on Premium: £0
    • SDLT on Rent: Calculated based on the Net Present Value (NPV) of the rent over the lease term.

Conclusion: It’s important to be aware of the purchase price or premium thresholds and consider the implications of annual rent in leasehold arrangements. 

Exemption. Transactions Without Financial Consideration

(SDLT Classifications, Reliefs and Exemptions>SDLT Exemptions)

Transactions that involve transferring property without any financial payment or exchange of value, like gifts or inheritances, are exempt from Stamp Duty Land Tax (SDLT).

Introduction:

  • Context: Stamp Duty Land Tax (SDLT) is a tax on property transactions in the UK. Normally, it’s calculated based on the financial value of the transaction.
  • Focus of Exemption: This exemption specifically targets transactions where no financial consideration is exchanged.

Defining ‘Financial Consideration’:

  • Broad Definition: Financial consideration in property transactions includes any form of monetary payment, services, or any exchange that holds monetary value.
  • Examples: Direct cash payments, assumption of mortgage or debts, transfer of valuable assets, or even services rendered in exchange for the property.

Scope of the SDLT Exemption:

  • Eligibility Criteria: The exemption applies when a property or land transfer occurs without any monetary payment or an equivalent exchange of value.
  • Types of Transactions: Typically includes gifts, inheritance, or transfers made without any reciprocal financial benefit to the giver.

Detailed Exemption Criteria:

  • Absence of Monetary Exchange: The key criterion for this exemption is the complete absence of a monetary transaction or its equivalent.
  • Debt and Mortgage Considerations: The assumption of debt or mortgage by the recipient can be considered financial consideration and might negate the exemption.
  • Exemption Application: If a property is transferred and the recipient does not pay the giver in any form, nor assumes any obligations like debt, the transaction is exempt from SDLT.

Examples and Scenarios:

  1. Gifts: A parent transferring a property to a child with no expectation of payment.
  2. Inheritance: Property passed down through a will or estate, where no purchase or payment is involved.
  3. Property Settlements: Transfers under certain legal agreements like divorce settlements, where one party relinquishes property rights without financial compensation.

Understanding Financial Consideration:

  • Nature of Exchange: Financial consideration isn’t limited to cash transactions. It includes any exchange that can be quantified monetarily.
  • Evaluating Debt Transfer: Transferring a property with an existing mortgage can be tricky. If the recipient takes over the mortgage, this might be seen as financial consideration.
  • In-kind Transactions: Bartering or trading services for property might also constitute financial consideration.

Complexities and Considerations:

  • Legal Nuances: Legal advice is often required in determining if a transaction qualifies for this exemption.
  • Documentation and Proof: Maintaining clear records to prove the absence of financial consideration is vital for claiming the exemption.

Impact and Implications:

  • Estate and Gift Planning: This exemption is particularly relevant in estate planning and gifting, offering a way to transfer property without incurring SDLT.
  • Tax Planning: Understanding this exemption can be an important element of tax planning for individuals and families.

Conclusion: The SDLT exemption for transactions without financial consideration is an important aspect of property tax law, providing relief in specific circumstances where property is transferred without a financial exchange. 

Exemption. Certain Leasehold Purchases

(SDLT Classifications, Reliefs and Exemptions>SDLT Exemptions)

In UK leasehold transactions, exemptions from notifying HMRC and paying SDLT depend on the lease’s duration and specific financial limits.

When engaging in leasehold transactions in the UK, certain situations do not require you to notify HM Revenue and Customs (HMRC) or pay Stamp Duty Land Tax (SDLT). Understanding these exemptions can help you navigate your property transactions more efficiently. Below, we expand on the conditions under which these exemptions apply, categorised by the lease duration.

Leasehold Transactions Exempt from HMRC Notification and SDLT

When engaging in leasehold transactions in the UK, certain situations do not require you to notify HM Revenue and Customs (HMRC) or pay Stamp Duty Land Tax (SDLT). Understanding these exemptions can help you navigate your property transactions more smoothly. Below, we detail the specific conditions under which these exemptions apply.

Leasehold Purchases with a Lease of 7 Years or More

In some cases, acquiring a leasehold interest in a property for a term of 7 years or longer does not necessitate notifying HMRC or paying SDLT. These conditions include:

  • Purchasing a New or Assigned Lease: If you are buying a new lease or taking over (assigning) an existing lease with a term of 7 years or more, you are exempt from SDLT and the need to inform HMRC, provided that:
    • The purchase price (referred to as the ‘premium’) is under £40,000.
    • The annual rent is less than £1,000.
  • Assigning or Surrendering a Lease: When you transfer (assign) or give up (surrender) a lease that was originally granted for a term of 7 years or more, whether the property is residential or non-residential, you are not required to pay SDLT or report to HMRC if:
    • The total consideration (the amount paid for the lease assignment or surrender) is less than £40,000.

Leasehold Property Purchases with a Lease of Less Than 7 Years

For leasehold properties where the lease term is shorter than 7 years, the rules for SDLT and reporting to HMRC are slightly different:

  • New or Assigned Leases of Less Than 7 Years: If you are acquiring a new lease or taking over an existing lease with a term of less than 7 years, you will be exempt from SDLT and the requirement to notify HMRC, provided that:
    • The total chargeable consideration (the value of what you’re paying for the lease) falls below the current SDLT thresholds for residential or non-residential properties.

Key Points to Remember

  • The exemptions from SDLT and the requirement to report to HMRC are specifically tied to the lease term and the financial thresholds mentioned.
  • For leases of 7 years or more, both the premium and the annual rent must meet the specified criteria to qualify for the exemption.
  • For leases shorter than 7 years, the focus is on the total chargeable consideration in relation to the SDLT thresholds.
  • Always ensure to check the most current SDLT thresholds and regulations, as these can change and may affect your transaction.

Understanding these exemptions can significantly impact your leasehold transactions, potentially reducing your costs and administrative effort.

 

Contract not performed. SDLT refunded

(SDLT Classifications, Reliefs and Exemptions>SDLT Exemptions)

If a property transaction fails after SDLT is paid, you can still claim a refund beyond the traditional 12-month period if the contract is rescinded, as clarified by the Candy case ruling.

There are instances where SDLT is paid, but the transaction doesn’t go through as planned. This raises the question: Can you get your SDLT back if the deal falls apart?

The Issue with SDLT Refunds

  • Scenario: Imagine a retailer agrees to lease a property. They sign the agreement, enter the property, and even start fitting it out for their business. This action is considered “substantial performance” of the lease agreement, triggering the SDLT payment.
  • Problem: What if the lease agreement is later cancelled? For example, the retailer finds out they can’t get the necessary planning consent and decides to back out. The law allows for a refund of SDLT in such cases, but there’s a catch.

The 12-Month Rule and Its Limitations

Traditionally, if you wanted to amend your SDLT return to claim a refund, you had to do it within 12 months of the filing date. This was highlighted in the 2018 Smallman case, which interpreted the law to mean that if your contract is rescinded (cancelled) after this 12-month period, you’re out of luck. You wouldn’t be able to amend your return to get a refund.

The Candy Case

  • Date: 26 February 2020
  • Outcome: The First Tier Tribunal examined a similar situation in the case of Candy. They found that the interpretation in the Smallman case was incorrect. According to the Candy ruling, taxpayers can indeed amend their SDLT returns to claim a refund even if the 12-month period has passed, provided the amendment is due to a contract being rescinded.

What This Means for Taxpayers

The Candy case is significant because it opens the door for more people to reclaim SDLT in situations where their contracts are rescinded after the initial 12-month period. This ruling provides a broader scope for taxpayers to correct their SDLT liabilities and recover funds in cases where transactions do not complete as expected.

Key Points to Remember

  • SDLT is payable on substantial performance of a property transaction.
  • Traditionally, amendments for refunds had to be made within 12 months.
  • The Candy case extends this period, allowing for later amendments if a contract is rescinded. 

Exemption. Mobile Homes, Caravans and Houseboats

(SDLT Classifications, Reliefs and Exemptions>SDLT Exemptions)

Mobile homes, caravans, and houseboats often avoid SDLT because they are not permanent structures, usually fall under licenses rather than leases, and are designed for easy relocation without land damage.

Mobile Homes and Caravans

Mobile homes, often referred to as park homes, and caravans, offer residential or temporary accommodation options that are distinct from traditional real estate investments. Their unique characteristics lead to a different treatment under SDLT legislation, making them an attractive proposition for property investors. Here’s why these assets are generally not subject to SDLT:

  • Classification and Annexation: The key to their SDLT exemption lies in how these properties are classified and their degree of annexation to the land. Unlike fixed properties, mobile homes and caravans are not considered permanent structures affixed to the land in a way that makes them immovable without significant effort or cost. This classification often places them outside the scope of SDLT.
  • Nature of Occupancy Agreements: The agreements governing the occupancy of pitches for mobile homes or caravans frequently fall under licences rather than leases. These licences typically allow for non-exclusive use of a space within a park or site, offering flexibility to both the site operator and the occupant. Since SDLT is not levied on licences to occupy land, this further contributes to the exemption of mobile homes and caravans from the tax.
  • Mobility: The inherent mobility of these assets, designed to be moved from place to place without causing damage to the land, plays a crucial role in their tax treatment. This characteristic distinguishes them from more permanent structures and has led to

 SDLT Considerations for Mobile Homes and Caravans

The SDLT legislation does not specifically address mobile homes or caravans. Instead, whether SDLT is applicable depends on several factors related to the nature of the property and the land it occupies.

Is the Property Part of the Land?

  • The key question is whether the mobile home or caravan is considered part of the land. This determination depends on:
    • The purpose for which it was erected.
    • The degree to which it is annexed to the land.
  • If a mobile home or caravan is deemed a dwelling contributing to the enjoyment of the property as a whole, it may be considered part of the land.
  • Conversely, if a caravan is easily movable without damaging the land and is enjoyed independently of the land, it may be classified as a chattel, separate from the land.

Lease or Licence?

  • The nature of the agreement between the occupier and the site operator plays a crucial role in determining SDLT liability.
  • Lease: An agreement granting exclusive occupation of a specific area for a fixed term is likely a lease, which may be subject to SDLT.
  • Licence: An agreement allowing for the mobility of the home or providing the site operator access to the property is likely a licence, not subject to SDLT.

Investment Scenarios for Property Investors

Investing in a Park Home

  • A property investor decides to purchase a park home within a residential park. The agreement with the park grants the investor exclusive use of the plot for a set number of years. In this scenario, the agreement might be considered a lease, potentially subjecting the investor to SDLT depending on the value of the lease.

Renting Out a Caravan

  • Another investor purchases a caravan to rent out as a holiday home. The caravan is located in a holiday park, where it can be moved between pitches. The agreement with the park does not grant exclusive use of any pitch and is renewed annually. This arrangement is likely considered a licence, exempting the investor from SDLT on the caravan and the pitch.

Key Considerations for Property Investors

  • Nature of Agreement: Understanding whether an agreement constitutes a lease or a licence is critical for assessing SDLT liability.
  • Property Classification: Determining whether a mobile home or caravan is part of the land or a separate chattel affects SDLT applicability.

Houseboats 

 Understanding Mooring Rights

Mooring rights refer to the permission granted to a boat owner to anchor or tie up their vessel at a specific location along UK inland waterways or coastal waters. These rights are considered an interest in land and, depending on the agreement’s nature, may be subject to SDLT.

Types of Mooring Agreements

Mooring agreements can generally be classified into two types: leases and licences. The distinction between these two types has significant implications for SDLT.

  • Lease Agreements:
    • If the agreement grants exclusive possession of a berth (the spot where the boat is moored) for a specific term and requires a payment, it is likely considered a lease.
    • SDLT is due on the consideration (payment or value exchanged) for granting or transferring the lease. This may include the price paid for the houseboat if the boat comes with the mooring rights and is permanently attached to the mooring.
  • Licence Agreements:
    • If the agreement allows the mooring operator to move the boat to another berth if necessary or permits the operator to access the berth without prior notice, it is more likely a licence.
    • Licences are generally not subject to SDLT, providing a potential tax exemption for houseboat owners.

SDLT Exemptions and Considerations

When purchasing a houseboat and entering into a mooring agreement, several factors determine whether the transaction is subject to SDLT:

  • Moveable Property:
    • If the houseboat can be easily disconnected from main services (e.g., water, electricity) using simple fittings and its removal does not damage the land, it is considered moveable property.
    • Moveable property is not subject to SDLT, offering an exemption for houseboat owners under certain conditions.
  • Permanent Attachments:
    • If there is a structure that is part of the boat and it is permanently secured to the land, moving it would damage the land’s fabric. In such cases, the structure is treated as a fixture.
    • Fixtures are subject to SDLT, meaning if your houseboat setup involves permanent attachments to the land, you may be liable for SDLT.

Scenario 1: Long-Term Mooring Lease

  • Investor Jane purchases a houseboat along with a mooring agreement that grants her exclusive use of a specific berth in a marina for 15 years. She pays a significant upfront fee for this privilege.
    • In this scenario, because Jane has exclusive use of the berth for a fixed term and has paid for this right, her agreement is considered a lease. Therefore, SDLT is due on the total consideration, which includes both the cost of the houseboat and the mooring rights.

Scenario 2: Flexible Mooring Licence

  • Investor Mike enters into an agreement with a mooring operator that allows him to dock his houseboat at a marina. The agreement specifies that the operator can move the houseboat to another berth if necessary and can access the berth without prior notice to Mike.
    • Mike’s agreement is classified as a licence due to the lack of exclusive possession and the operator’s retained rights to move the boat and access the berth. Consequently, Mike’s arrangement is not liable to SDLT.

Scenario 3: Houseboat with Permanent Attachments

  • Investor Sarah buys a houseboat that includes a built-in structure extending onto the land, which is permanently secured and cannot be removed without damaging the land.
    • Since the structure forms part of the houseboat and is permanently attached to the land, it is considered a fixture. In this case, Sarah’s purchase will attract SDLT because removing the structure would involve damaging the land’s fabric.

Scenario 4: Easily Movable Houseboat

  • Investor Alex acquires a houseboat that is connected to main services through ‘push fit’ fittings, allowing for easy disconnection. The boat can be removed from its moorings without causing any damage to the land.
    • Alex’s houseboat is treated as movable property since it can be easily disconnected and moved without harming the land. Therefore, his investment is not subject to SDLT.

Practical Steps for Property Investors

  • Review the Mooring Agreement: Carefully examine whether the agreement is classified as a lease or a licence. This distinction is crucial for determining SDLT liability.
  • Assess the Houseboat’s Connection: Evaluate how the houseboat is connected to utilities and the mooring itself. Easily removable connections without causing land damage offer a path to SDLT exemption.
  • Consider the Long-term Plan: If you intend to make permanent structures connecting the houseboat to the land, be prepared for potential SDLT charges. Planning ahead can help manage financial implications.

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This Article Written By Nick Garner
Founder Stamp Duty Advice Bureau
Author of Stamp Duty Land Tax Guide
For Property Investors.