3% stamp duty land tax (SDLT) surcharge and linked transactions

We recently considered a scenario where a property development company was considering acquiring a £3m house for development purposes

The issue

More accurately, the position was as follows:

• House with very large garden being sold for £3m.
• Most of the value was in the garden due to planning permission.
• The house itself was worth £500,000 and the garden was worth £2.5m.
• The development company really only wanted to acquire the garden but the seller would only sell on an all or nothing basis.

The company wanted to know if the SDLT position could be improved if it bought the garden in one group company and the house in another group company. The suggestion revolved around a belief that non-residential rates would apply to the garden and therefore the 3% surcharge would be saved.

It was tempting to bat this suggestion away by explaining that the garden is clearly residential property and anyway these two transactions would clearly be linked, however such an answer would be obtuse.

The true analysis would be as follows:

• The transactions are linked which means that SDLT rates have to be applied to the total consideration.
• As per HMRC guidance, the acquisition of the garden would be subject to residential rates although no 3% surcharge would be applicable to the garden transaction because there is no dwelling in that transaction.
• There is no legislation that has the power to impose a 3% surcharge on a transaction that does not include a dwelling, even if the transaction includes a garden which is used by the house in a linked transaction.

The SDLT calculation

This would work as follows:

• Total SDLT using residential rates on £3m is £271,250 (£250,000 @ 0%, £675,000 @ 5%, £575,000 @ 10%, £1.5m @ 12%).
• Before applying the 3% surcharge, this would be allocated £45,208 to the house transaction and £226,042 to the garden transaction.
• Applying the surcharge to the house transaction would mean that £60,208 is payable in respect of this and £226,042 is payable in respect of the garden.

Hamilton Rose's view

The rule of thumb for linked transactions is that you look at the transaction as a whole and then calculate the SDLT as if the subject matter has been acquired in a single transaction. Although this may often give the right answer, rigidly following this approach will lead to errors.

For example, there is a rule where non-residential rates can be applied to the acquisition of six or more dwellings, however this only applies if those dwellings are acquired in the same transaction. The SDLT position in the example above could possibly be improved further if the house can simultaneously be sold on to an end-buyer on the completion date for the whole transaction (using ‘sub-sale relief’).

Any linked transactions involving residential property should be reviewed to check that the 3% surcharge has not been applied inappropriately to transactions which do not include a dwelling.