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Historically, it was possible to avoid or defer payment of stamp duty land tax (SDLT) on land purchases by leaving the transaction ‘resting on contract’, meaning that the contract for the purchase of a property would be exchanged and the purchase price would be paid by the buyer to the seller but the actual transfer of the legal interest in the property would not pass to the buyer. The Finance Act 2013 introduced a number of anti-avoidance provisions with respect to SDLT which apply to all instruments executed on or after 13 February 2013. Now, SDLT is chargeable on substantial performance of the transaction rather than completion of the transfer document. Substantial performance includes payment of the consideration or taking possession of the property. The ability to defer SDLT by resting on contract has been brought to an end.
SDLT is payable on acquisitions of chargeable interests in land within 14 days of the effective date, being the earlier of completion and substantial performance. Where SDLT is paid on the substantial performance date, any subsequent conveyance or transfer of the land will not be stampable and if the contract is subsequently rescinded or annulled, a refund of the SDLT paid on the contract date may be available.
It is no longer possible to ‘rest on contract’ to avoid payment of SDLT because of the substantial performance rule in section 44 of the Finance Act 2003. If the transaction is completed without previously having been substantially performed, the contract and the transaction effected on completion are treated as part of a single land transaction. In this case, the effective date of the transaction is the date of completion. If, however, the contract is substantially performed without completion of the legal transfer of title, the contract is treated as if it were itself the transaction provided for in the contract. In this case, the effective date of the transaction is when the contract is substantially performed.
Issues for developers
Some developers can still be caught out by stamp duty issues where they are eager to get on-site and take possession of the site ahead of completion. The taking of possession may trigger substantial completion of the contract and the payment of theSDLT. What amounts to possession as a legal concept is quite wide and it may not need to amount to exclusive possession. HMRC has stated that entry by a future tenant to carry out fit-out works is taking possession so HMRC is unlikely to see commencing site preparations differently. Substantial performance could also be triggered where possession is taken for a short period then handed back. For example, to start site preparations and to erect hoarding.
If the contract is substantially performed by the developer taking possession ahead of legal completion and they pay the SDLT due, in the event that the contract is terminated some years later because the conditions are not met, then the recent decision in Candy v HMRC [2020] UKFTT 0113 is good news, which held that the usual 12-month time limit for a reclaim of SDLT did not apply in these circumstances.
Here to Help
If you have any more questions or you would like further information on how we can help, you can contact our Commercial Property Team on 0161 941 4000 or email The Commercial Property Team.