The Prudential case and why it is important for sale and development transactions

The issue

Transactions where developers sell some land to a buyer and then build a property on it, are quite common. In these cases it can sometimes be difficult for the buyer to determine what value should be used to calculate the stamp duty land tax (SDLT) liability. Put simply, the question is whether SDLT should be paid in respect of the cost of the land, or on the cost of the land and the subsequent development. These issues were considered in the Prudential case, which is still considered to be good law today.

The Prudential case

This kind of scenario was considered in quite a high level of detail in the case of Prudential Assurance Company Limited v Inland Revenue Commissioners (1992).

The rule from the Prudential case means that:

• where P, a purchaser of a parcel of land, bought the site for one consideration and entered into a building contract under which V, the vendor, agreed to construct a building on the site for P,
• the price P paid under the building contract was not to be taken to be part of the consideration for the sale of the land unless the transactions were so intertwined that, in reality, P was buying land with a completed building on it.

If, therefore, it could be shown that each transaction was self-contained, stamp duty was only charged on the land price. The minimum requirements for this were that the bare land was conveyed to P before construction works began and that neither P nor V was entitled to unwind the land transaction (for example, by exercising put or call options) if the construction contract went bad.

Sir Donald Nicholls V-C of the Prudential case determined that, as long as the contract for the sale of the land and the development agreement can be kept independent, then SDLT will be chargeable on the subject of the land sale but not on the subsequent construction works.

Legislation

Legislation was introduced in FA 2003 which states the requirements in more precise terms. Consideration for SDLT purposes includes both money and money’s worth (FA 2003 Sch 4 para 1). Specific examples of money’s worth are then referred to throughout Sch 4. One such example is the carrying out of works (para 10). This paragraph states that where the whole or part of the consideration consists of the carrying out of works for construction, improvement or repair of a building, or other works to enhance the value of the land, then the value of the works should be taken into account to calculate the consideration chargeable to SDLT. However, there is an exemption from this if the following requirements are met:

(a) that the works are carried out after the effective date of the transaction;

(b) that the works are carried out on land acquired or to be acquired, under the transaction, or on other land held by the purchaser, or a person connected with him; and

(c) that it is not a condition of the contract that the works are carried out by the vendor or a person connected with him.

Therefore if a purchaser acquires land from a vendor and, under a separate construction contract, agrees for the vendor to build the property, the value of those works does not need to be taken into account for the purposes of SDLT as long as the construction is not a condition of the first contract.

Forbes Dawson view

This is a good example of why contracts should be reviewed from a tax perspective (and particularly an SDLT perspective) before they are entered into. In some cases the SDLT payable can be significantly different for different contracts, which materially achieve the same commercial outcome. For example, it would generally be unhelpful to have a single contract where the buyer buys some land and services for £X. Rather the land and the services should be set out in separate independent contracts. This may not always be commercially practical but it should be considered.

 

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