Following legal advice, it has been suggested that my client use a “sale and leaseback” arrangement to do this, under which the freehold will be transferred to a related company (owned by my client and a family member) in return for a long lease of 999 years granted back to the first company. The companies are not in a group.
Can you please clarify the stamp duty land tax (SDLT) position and outline any capital gains implications arising from such proposals?“
A: Stamp Duty Land Tax (SDLT)
In law a person cannot “grant a lease to himself” (Rye v Rye [1962] A C 496) and so sale and leaseback arrangements may be used to create separate leasehold interests from a superior interest (which can be a freehold or leasehold).
This typically involves the transfer of the initial interest to a third party or parties (which can include the transferor as a joint transferee) under an agreement that requires a lease to be granted back in return.
There is a specific relief available in such circumstances which provides that the “lease back” is exempt from SDLT where the statutory conditions are met (see below).
In the absence of this relief, the transfer of the freehold and the leaseback would be treated as an “exchange” of interests for SDLT purposes, with the consideration for each party typically being based-on the market value of the property interests received by each party under the arrangements (para 5, Sch 4, FA2003).
Although the initial freehold transfer is not exempt under sale & leaseback relief, it can be valued subject to the leaseback (as the “reversionary interest”). Where the lease is very long and the reversionary interest does not carry the right to significant ground rents, it is likely that little or no SDLT would be due on the initial transfer, as its value would fall within the SDLT nil or lower rate bands. HMRC confirm their view that a written agreement for the leaseback must exist at the time of the initial transfer for the relief to apply (SDLTM16040).
The principal conditions for the relief are as follows:
“(a)…the sale transaction is entered into wholly or partly in consideration of the leaseback transaction being entered into,
(b) that the only other consideration (if any) for the sale is the payment of money or the assumption, satisfaction or release of a debt (or both),
(c) that the sale is not a transfer of rights within the meaning of [section] 45A (contract providing for conveyance to third party: effect of transfer of rights) or a pre-completion transaction within the meaning of Schedule 2A (transactions entered into before completion of contract), and
(d) where A and B are both bodies corporate at the effective date of the leaseback transaction, that they are not members of the same group for the purposes of group relief (see paragraph 1 of Schedule 7) at that date” (s57A FA 2003).
(Although not relevant in this case, note the exclusion for transactions between companies within a group where “group relief” would be available instead).
Capital Gains
From a capital gains perspective, a sale and leaseback is treated-as a “part disposal” by the original transferor, rather than two separate transactions (Sargaison v Roberts). Any chargeable capital gain is therefore a function of the difference in value held by the transferor immediately before and after the completion of the relevant transactions, with a proportion of the capital gains base cost being deductible in the computation (CG70774).
Example
Commercial property – sale & leaseback with freehold transfer for grant of 999-year lease between an individual and a connected company.
Freehold reversionary interest value £500 (A)
Value of 999-year lease £399,500 (B)
Freehold cost brought-forward £300,000
(For SDLT purposes, assuming the conditions for sale & leaseback relief are met, no SDLT is chargeable on the freehold acquisition as its market value (subject-to the lease) is less-than the available nil rate band (£150,000 for commercial or mixed property). The leaseback is exempt from SDLT if the conditions at s57A FA 2003 are met).
Capital gain computation:
Freehold disposal value (£400,000 less £399,500) = £500
Cost £300,000 x A) 500/ A) 500 + B) 399,500 = (£375)
Chargeable Gain £125
A formal valuation of the freehold may be recommended for your client if the reversionary interest did carry the right to significant ground rents.
