SDLT: is sale & leaseback always an ‘exchange’?

Marc Selby

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For SDLT purposes, since a sale and leaseback transaction will always involve the acquisition of a major interest (there will be one on each of the sale and leaseback limbs of the transaction) the market value rule in FA 2003 Sch 4 para 5(3) will apply if it is an exchange. However, for the transaction to constitute an exchange the conditions in both FA 2003 ss 47(1) and 47(2) must be satisfied. As the examples in this article demonstrate, it must not be assumed that these conditions are satisfied in the case of every sale and leaseback transaction.

Sale and leaseback transactions are in practice invariably assumed to constitute exchanges for SDLT, so that the chargeable consideration will (save in respect of the rent chargeable on the leaseback) be equal to the market value of the subject matter acquired (on both the ‘sale’ and the ‘leaseback’ limbs of the transaction) in accordance with FA 2003 Sch 4 para 5(3). This assumption is made by HMRC as well as those advising taxpayers (see SDLT Manual para 16040). In the writer’s view, that assumption is not always correct. In order to test the ‘exchange’ assumption it is first necessary to explain what a ‘sale and leaseback’ transaction is. For this we turn to FA 2003 s 57A(2) (s 57A sets out the conditions for SDLT relief on the leaseback limb of sale and leaseback transactions), which states as follows:

‘(2)   A ‘sale and leaseback’ arrangement means an arrangement under which-
(a)   A transfers or grants to B a major interest in land (the ‘sale’), and
(b)   out of that interest B grants a lease to A (the ‘leaseback’).’

Hence, a sale and leaseback transaction can arise where what is demised under the lease granted by B to A comprises the whole or part of the land transferred or granted by A to B.

Next, it is necessary to identify what is meant by an ‘exchange’. The relevant conditions are in FA 2003 s 47, which reads as follows:

‘47 Exchanges

Where a land transaction is entered into by the purchaser (alone or jointly) wholly or partly in consideration of another land transaction being entered into by him (alone or jointly) as vendor, this Part applies in relation to each transaction as if each were distinct and separate from the other…
A transaction is treated for the purposes of this Part as entered into by the purchaser wholly or partly in consideration of another land transaction being entered into by him as vendor in any case where an obligation to give consideration for a land transaction that a person enters into as purchaser is met wholly or partly by way of that person entering into another transaction as vendor.
As to the amount of the chargeable consideration in the case of exchanges and similar transactions, see--paragraphs 5 and 6 of Schedule 4 (exchanges, partition etc)...’

Pausing there, the following comments can be made

Section 47(1) provides that an exchange requires at least two land transactions, one of which must be entered into by the purchaser (alone or jointly) wholly or partly in consideration of another land transaction entered into by him as vendor. In that event, SDLT is due in respect of each transaction as if each were separate and distinct from the other or others;
Hence, the same person must act (either alone or jointly) as purchaser in one transaction and as vendor in another. In the sale and leaseback transaction between A and B referred to above B will be both purchaser (of the major interest transferred or granted by A) and vendor (of the leaseback to A). A will also be both purchaser (of the leaseback from B) and vendor (of the major interest transferred or granted to B);
Section 47(2) stipulates when a transaction is treated as entered into by the purchaser wholly or partly in consideration of another transaction being entered into by him as vendor. It might be argued that a transaction can be an exchange if it falls within s 47(1) even if it does not satisfy the test in s 47(2). Indeed, HMRC appear to ignore s 47(2), as if it were superfluous, in its published guidance (see ‘Consideration and exchanges’, Stamp Taxes Bulletin, November 2010). However s 47(2) is expressed in mandatory terms and applies ‘for the purposes of this Part’, ie, FA 2003 Part 4 which incorporates all of the primary SDLT legislation. It is therefore considered the better view that a transaction cannot be an exchange unless the conditions in s 47(2), as well as s 47(1), are satisfied;
Accordingly, for the market value rule in Sch 4 para 5(3) to apply, it is considered that the conditions in both s 47(1) and s 47(2) must be satisfied;
In order for s 47(2) to be satisfied, at least one of the parties must be under an obligation to give consideration for a land transaction which he enters into as purchaser;
That obligation by the purchaser to give consideration must be ‘met wholly or partly’ by way of him entering into another transaction as vendor; and
Hence, in the sale and leaseback transaction between A and B referred to above, B must be under an obligation to give consideration for his acquisition from A and that obligation must be met wholly or partly by B granting the leaseback to A. Alternatively A must be under an obligation to give consideration for the leaseback from B and that obligation must be met wholly or partly by A transferring or granting the major interest to B.

See Examples 1 to 5 below for the application of these principles in different scenarios.

Example 1:

A agrees to sell a freehold development site to B Limited on which B Limited intends to construct a block of 20 new flats for sale. The consideration for the sale is £5m plus B Limited granting long leases at nominal rents of two of the completed flats to A. The agreement provides that the consideration is exclusive of VAT (A having opted to tax the property for VAT).

Analysis: The long leases of the two completed flats which B Limited has agreed to grant to A will constitute valuable consideration and it is clear that part of the consideration for B Limited’s purchase from A will be met by the grant of those leases. This is therefore an exchange transaction so that the chargeable consideration for B Limited’s purchase will be the market value of the land acquired from A and, in these circumstances, one ignores the VAT actually chargeable by A (see SDLT Manual paragraph 4140 SDLT Manual).

Example 2:

Mr A owns the freehold of a house which is in a strategic part of a development site being assembled by B Limited, a house builder. Mr A accepts B Limited’s offer to buy the house for £750,000, having been advised by a local agent that the house has a market value of only £500,000. However, Mr A requires to remain in occupation of the house for a period of 6 months pending the refurbishment of his new home, which he has recently purchased. This condition is accepted by B Limited, but B Limited is concerned that the house might be occupied by squatters. It is therefore agreed that, upon B Limited’s purchase of the house, B Limited will grant Mr A a 6 month tenancy of the house at a nominal rent, but on the basis that the tenancy agreement will contain a prohibition against Mr A assigning, sub-letting or parting with possession of the house and will provide that Mr A must remain in occupation until the end of the term and can only vacate before then upon obtaining B Limited’s consent.

Analysis: The grant of the 6 month tenancy by B Limited to Mr A is clearly of value to Mr A, even if it is not a benefit which would be capable of being converted into money (see Tennant v Smith [1892] AC150). Because the tenancy is of value to Mr A, and notwithstanding that its value could not be converted into money, it is considered that the consideration B Limited is to provide to Mr A would be met partly by the grant of the tenancy to Mr A. Accordingly, the transaction will constitute an exchange and the chargeable consideration for B Limited’s purchase will be the market value of Mr A’s house.

Example 3:

Mrs A owns the freehold of a house in another strategic part of the development site being assembled by house builder B Limited. B Limited offers to buy Mrs A’s house for £850,000 (Mrs A having been advised that the house has a market value of £525,000), but the offer is conditional on Mrs A being granted a 6 month tenancy of the house at a nominal rent and subject to the same conditions as are contained in the tenancy granted to Mr A in Example 2 above. Mrs A says that she has no need to occupy the property following completion and does not wish to be granted the 6 month tenancy. After further discussions, Mrs A accepts B Limited’s offer on the basis that a 6 month tenancy will be granted, save that she is to have no obligation to occupy the house and will be granted the right to terminate the tenancy at any time before the end of the 6 month term on giving 7 days’ notice to B Limited.

Analysis: In this case, the tenancy has no market value and, importantly, it has no value to Mrs A. B Limited’s obligation to give consideration to Mrs A is not met, even partly, by the grant of the tenancy to Mrs A. From Mrs A’s perspective, any obligation which she might have to give consideration for the leaseback would be purely nominal and would not be met, even partly, by the sale of the house. The transaction is therefore not an exchange and B Limited’s SDLT liability is determined by reference to the consideration of £850,000 it actually pays to Mrs A. The market value rule in Sch 4 para 5(3) will not apply.

Example 4:

Mrs AA, an elderly widow, gifts her house, worth £1m, to her daughter, Mrs B. On the following day, in order that the value of the house is not retained within Mrs AA’s estate for inheritance tax under the gift with reservation rules, Mrs B voluntarily (and without having entered into a prior agreement) grants a lease of the house to Mrs AA at a market rent.

Analysis: HMRC may contend that the transaction is an exchange on the basis that the leaseback from Mrs B to Mrs AA was “‘as a matter of fact, wholly or in part a quid pro quo”’ for the gift of the house from Mrs AA to Mrs B (see “‘Consideration and exchanges”’, Stamp Taxes Bulletin – November 2010). However, since Mrs B acquired the house by way of gift, there was no obligation on her to give consideration for the acquisition. As far as Mrs AA is concerned, although she has entered into the lease as purchaser, she has transferred her house in order to make a gift to Mrs B and to reduce the value of her estate in Mrs B’s favour, not to meet any obligation to give consideration for the lease. Accordingly, the market value rule in FA 2003 Sch 4 para 5(3) does not apply.

Example 5:

A plc, a FTSE 100 company, owns the freehold of the head office building which it occupies for the purpose of its trade. The property is worth £7m with vacant possession but, if it was sold subject to and with the benefit of a lease for a term of 15 years in institutional form with A plc as the tenant reserving a full market rent of £600,000 (subject to upward only review), it would be worth £10m. A plc sells the property to B plc, a property investment company, for £10m, with B plc granting a leaseback of the property on the above terms to A plc.

Analysis: This is considered to be a variant of Example 2 above. In this Example the leaseback will be of value to A plc because it will beneficially occupy the building demised by the leaseback for the purpose of its trade. Because the leaseback is of value to A plc, and notwithstanding that the lease may not be capable of being converted into money (as in the case of the tenancy granted to Mr A in Example 2 above), or even that A plc might have to pay a reverse premium to a third party to take an assignment of the lease, it is considered that the consideration B plc is providing to A plc would be met partly by the grant of the lease to A plc. Accordingly, the transaction will constitute an exchange and the chargeable consideration for B plc’s purchase will be the market value of the property purchased from A plc.

Additionally:

• It is assumed that the transaction will, in this case, be governed by a written agreement under which B plc will agree to purchase the property from A plc and A plc will simultaneously be granted the leaseback, so that the market value on which B plc’s SDLT liability is computed will be based on the value of the property with the benefit of the leaseback (i.e. £10m), and not the vacant possession value. This treatment would be consistent with HMRC’s guidance in SDLT Manual, para 16040.

• However, the market value on which B plc’s SDLT liability is computed would exclude VAT, even if VAT is chargeable on the sale (see SDLT Manual, para 4140).

• The conditions for the leaseback exemption in FA 2003, Section s 57A should be satisfied, although A plc would need to claim the exemption by filing a return. However, if A plc claims this exemption and subsequently assigns the lease, that assignment will (subject to certain exceptions) be treated for SDLT as if it were the grant of a new lease by A plc to the assignee for the then residue of the term of the lease and on the same terms as the assignee holds the lease after the assignment (see FA 2003 Sch 17A para 11).

Marc Selby, Tax Partner at Laytons and a Council member of the STPG

Categories: Analysis , Property taxes , Real estate taxes , SDLT , Stamp taxes

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Hence, a sale and leaseback transaction can arise where what is demised under the lease granted by B to A comprises the whole or part of the land transferred or granted by A to B.

Next, it is necessary to identify what is meant by an ‘exchange’. The relevant conditions are in FA 2003 s 47, which reads as follows:

‘47 Exchanges

Where a land transaction is entered into by the purchaser (alone or jointly) wholly or partly in consideration of another land transaction being entered into by him (alone or jointly) as vendor, this Part applies in relation to each transaction as if each were distinct and separate from the other…
A transaction is treated for the purposes of this Part as entered into by the purchaser wholly or partly in consideration of another land transaction being entered into by him as vendor in any case where an obligation to give consideration for a land transaction that a person enters into as purchaser is met wholly or partly by way of that person entering into another transaction as vendor.
As to the amount of the chargeable consideration in the case of exchanges and similar transactions, see--paragraphs 5 and 6 of Schedule 4 (exchanges, partition etc)...’

Pausing there, the following comments can be made

Section 47(1) provides that an exchange requires at least two land transactions, one of which must be entered into by the purchaser (alone or jointly) wholly or partly in consideration of another land transaction entered into by him as vendor. In that event, SDLT is due in respect of each transaction as if each were separate and distinct from the other or others;
Hence, the same person must act (either alone or jointly) as purchaser in one transaction and as vendor in another. In the sale and leaseback transaction between A and B referred to above B will be both purchaser (of the major interest transferred or granted by A) and vendor (of the leaseback to A). A will also be both purchaser (of the leaseback from B) and vendor (of the major interest transferred or granted to B);
Section 47(2) stipulates when a transaction is treated as entered into by the purchaser wholly or partly in consideration of another transaction being entered into by him as vendor. It might be argued that a transaction can be an exchange if it falls within s 47(1) even if it does not satisfy the test in s 47(2). Indeed, HMRC appear to ignore s 47(2), as if it were superfluous, in its published guidance (see ‘Consideration and exchanges’, Stamp Taxes Bulletin, November 2010). However s 47(2) is expressed in mandatory terms and applies ‘for the purposes of this Part’, ie, FA 2003 Part 4 which incorporates all of the primary SDLT legislation. It is therefore considered the better view that a transaction cannot be an exchange unless the conditions in s 47(2), as well as s 47(1), are satisfied;
Accordingly, for the market value rule in Sch 4 para 5(3) to apply, it is considered that the conditions in both s 47(1) and s 47(2) must be satisfied;
In order for s 47(2) to be satisfied, at least one of the parties must be under an obligation to give consideration for a land transaction which he enters into as purchaser;
That obligation by the purchaser to give consideration must be ‘met wholly or partly’ by way of him entering into another transaction as vendor; and
Hence, in the sale and leaseback transaction between A and B referred to above, B must be under an obligation to give consideration for his acquisition from A and that obligation must be met wholly or partly by B granting the leaseback to A. Alternatively A must be under an obligation to give consideration for the leaseback from B and that obligation must be met wholly or partly by A transferring or granting the major interest to B.

See Examples 1 to 5 below for the application of these principles in different scenarios.

Example 1:

Example 2:

Example 3:

Example 4:

Example 5:

Additionally:

• However, the market value on which B plc’s SDLT liability is computed would exclude VAT, even if VAT is chargeable on the sale (see SDLT Manual, para 4140).

Marc Selby, Tax Partner at Laytons and a Council member of the STPG

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Marc Selby

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