How do transitional rules for stamp duty land tax (SDLT) work?

The issue

Rumours are rife that significant changes in SDLT rules may be around the corner. These rules may be introduced in the 31 October 2022 Budget, or they may be introduced sometime next year, after a period of consultation on the draft legislation. One example of a rule that is likely to change, is the rule, whereby, even a small piece of non-residential property within a transaction, can make the whole transaction subject to SDLT at lower non-residential rates.


Ned buys a house for £5m and a retail premises for £100,000 from the same vendor as part of the same transaction. Here, the rules dictate that non-residential rates apply as follows:

£150,000 @ 0%
£100,000 @ 2%
£4,850,000 @ 5%

which comes to £244,500.

Without the retail premises the lowest residential rates that could apply would be as follows:

£125,000 @ 0%
£125,000 @ 2%
£675,000 @ 5%
£575,000 @ 10%
£3,500,000 @ 12%

which comes to £513,750 (£269,250 more than non-residential rates) and that was calculated on £100,000 less consideration!

More detail on the possible changes can be seen by following this link to a previous Tax Bite.

It is this issue that makes the mechanics of the transitional rules particularly topical. Transitional rules usually apply when some aspect of a transaction has been entered into before the rules have been announced.

Transitional rules

Usually, when changes are announced there are transitional rules to prevent a buyer who has exchanged on a contract being hit with unexpected SDLT. The key points here are as follows:

1. Generally, a contract which exchanges but does not complete before new rules are announced will not be affected by those rules.
2. This protection will not apply if the contract is varied after the rule changes are announced. According to HMRC, such changes would include a change to the land being purchased, a change in the parties to the contract, or a change in the length of a lease.
3. In practice, HMRC have been known to exercise some discretion in this area.
4. There can also be protection where the property is acquired pursuant to the exercise of an option which was granted before the date of the rule change.
5. Although the legislation says that a claim for transitional relief needs to be made in the return, in practice the Stamp Office seem to accept that returns can simply be made using the old rates.

Forbes Dawson view

The take-home message here, is that any transactions which rely on rules which may be subject to change should be entered into before 31 October 2022. If it is not possible to complete on transactions before a suspected ‘tax event’, then exchange may be enough. For transactions that are not even at the exchange stage, then it may be possible for the buyer to ‘hedge their bets’ by entering into an option agreement. This will of course be subject to commercial agreement because such an option will usually place a potential obligation on the vendor to sell if the buyer exercises it.




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