Commercial constraints generally dictate that parties dealing at arm’s length give market value consideration when transacting business.
However, when the parties to a transaction are under common ownership, or when they are otherwise closely connected by the commercial arrangements between them, there can be the temptation to transact business using levels of consideration below market value to reduce the tax liabilities associated with certain transactions.
Some parts of the UK tax code (e.g. chargeable gains) have wide ranging rules providing that where the consideration for a transaction is less than a market value amount, the actual consideration paid will be ignored and market value taken into account for tax purposes.
SDLT and the market value rule
The SDLT regime has no such “blanket” market value consideration rule. However, the regime does contain certain specific market value rules that should be considered. Some of these are examined in detail below (all statutory references are to Finance Act 2003).
Connected companies
Section 53 requires that SDLT is paid on the market value of the property in question, where the purchaser is a company and either, (i) the vendor is connected with the purchaser, or (ii) any of the consideration takes the form of an issue or transfer of shares in a company.
Section 53 will cover most intra-group transactions, although in such circumstances, SDLT group relief will often be claimed to avoid a charge. However, if group relief is subsequently withdrawn because, for example, the group relationship is broken within three years, the “clawback” charge is also levied by reference to market value (paragraph 3(2)(a) Schedule 7).
There are some useful exceptions to the rule in section 53, set out in section 54. For example, in certain circumstances, the transfer of a chargeable interest to a corporate purchaser holding as trustee is exempt from the market value rule. More significantly, where the vendor is a company making a distribution of a chargeable asset, the section 53 rule can also be disapplied.
However, this disapplication only applies when the distributed assets are not acquired by the vendor company under a group relief claim within the last three years.
Exchanges
It is important to recall the requirements of stamp duty, which applied to land transactions before the introduction of SDLT in 2003. Stamp duty was only charged on the “equalisation money” in a land swap (i.e. the market value of the two estates in land fell out of charge, with stamp duty being charged only on cash paid to balance the value of the exchanged interests). While this rule still applies under SDLT, where only interests other than “major interests” in land are exchanged, the rule is now different for exchanges involving at least one major interest.
Section 117 provides that for SDLT purposes, a “major interest” is either a freehold or a leasehold estate. Where a major interest is involved in an exchange, paragraph 5(3) Schedule 4 provides that the chargeable consideration for each party will be the higher of the market value of the interest acquired by them, or the actual consideration given.
However, those in the case of a lease surrender and re-grant, paragraph 16 Schedule 17A states that the surrender will not count as chargeable consideration for the re-grant and the re-grant will not count as chargeable consideration for the surrender. Paragraph 16 goes on to display paragraph 5 of Schedule 4 in such cases.
Partnership Transactions
Schedule 15 provides that where a partnership acquires land from a wholly unconnected third party, it is to be subject to SDLT in the usual way. However, in most other transactions involving partnerships, Schedule 15 provides that SDLT will be levied by reference to the market value of the chargeable assets transferred.
Are you really doing this for a pound?
As noted above, for reasons completely unrelated to tax, commercial transactions are generally done for a market value consideration. Accordingly, where a transaction is being done for a nominal consideration, the parties should examine it critically when considering what the proper SDLT liability is.
The basic rule here is paragraph 7 Schedule 4. This requires any non-monetary consideration to be charged to SDLT by referring to the market value of that consideration. Further specific rules apply to the following: