Non-residential rates of SDLT did not apply to transactions involving a reservation agreement.
In Landmaster Investment Ltd and another v HMRC [2023] UKFTT 736 (TC) (3 August 2023), the First-tier Tribunal (FTT) found that in a residential property transaction, an agreement to reserve a property, and the actual purchase of the property, were not linked transactions and so the mixed-use rules did not apply. SDLT was chargeable on the whole of the consideration at the residential rates.
The appellant entered into an agreement with a property vendor to reserve an apartment in a residential property development in return for paying a reservation fee of 0.2% of the purchase price. The appellant then acquired a 999-year lease of the apartment and filed a land transaction return reflecting the SDLT residential rates. In a subsequent amendment to the return, the appellant’s agent attempted to reclassify the transaction as chargeable at the non-residential rates. HMRC disagreed and issued closure notices on the basis that the original return had been correct.
This appeal (together with a joined appeal on essentially the same point) proposed that there were two linked transactions: (1) the reservation agreement, which was an ‘option’ or ‘right of pre-emption’ falling outside the definition of residential property under FA 2003 s 116, and to which the non-residential SDLT rates must therefore apply, and (2) the acquisition of the lease. As one transaction was non-residential and the other was residential, this was a mixed-use situation and the non-residential rates would therefore apply.
Dismissing the appeal, the FTT decided that:
the reservation agreement entered into in each of these appeals imposed a personal obligation on the vendor not to negotiate with third parties during the reservation period and was therefore neither an option agreement nor a pre-emption agreement over land, and
as the entry into the reservation agreement was not a land transaction, it could not be a linked transaction with the acquisition of a lease over land.
Although obiter, the FTT also noted that even if the reservation agreement were an option or a pre-emption agreement over land (i.e. over the residential apartment) and even if it were linked with the acquisition of the lease of the apartment, the residential rate of SDLT would have been chargeable in any event since the physical apartment was residential land.
The decision was the same even if, at the time of entering into the reservation agreement, construction of the apartment had not yet begun.
Why it matters: This was yet another, but somewhat novel, attempt to bring a purchase of residential property into the non-residential rates of SDLT. This involved what was a genuine commercial agreement, where a prospective purchaser would pay a fee to reserve a property. The argument was that the reservation fee was an ‘option’ chargeable at the non-residential rates of SDLT. As it was linked to the acquisition of a residential property, that meant that both linked transactions were chargeable at the lower non-residential rates.
The FTT did not accept this, concluding that the reservation agreements were not options within the terms of the SDLT legislation and that the transactions as a whole were chargeable at the residential rate.
On the basis of the appellants’ reasoning in this case, the residential rates of SDLT would have had potentially limited application, as the FTT noted: ‘If the appellants’ arguments in these appeals had been accepted, that might have led to the question whether any purchaser of any residential property could avoid having to pay SDLT at the residential rate, through the simple device of entering into a reservation agreement shortly before contracts are exchanged.’
This decision is well worth reading for those who advise on SDLT. Paragraphs 67 to 78, in particular, review the position on options and rights of pre-emption in the context of SDLT.
Non-residential rates of SDLT did not apply to transactions involving a reservation agreement.
In Landmaster Investment Ltd and another v HMRC [2023] UKFTT 736 (TC) (3 August 2023), the First-tier Tribunal (FTT) found that in a residential property transaction, an agreement to reserve a property, and the actual purchase of the property, were not linked transactions and so the mixed-use rules did not apply. SDLT was chargeable on the whole of the consideration at the residential rates.
The appellant entered into an agreement with a property vendor to reserve an apartment in a residential property development in return for paying a reservation fee of 0.2% of the purchase price. The appellant then acquired a 999-year lease of the apartment and filed a land transaction return reflecting the SDLT residential rates. In a subsequent amendment to the return, the appellant’s agent attempted to reclassify the transaction as chargeable at the non-residential rates. HMRC disagreed and issued closure notices on the basis that the original return had been correct.
This appeal (together with a joined appeal on essentially the same point) proposed that there were two linked transactions: (1) the reservation agreement, which was an ‘option’ or ‘right of pre-emption’ falling outside the definition of residential property under FA 2003 s 116, and to which the non-residential SDLT rates must therefore apply, and (2) the acquisition of the lease. As one transaction was non-residential and the other was residential, this was a mixed-use situation and the non-residential rates would therefore apply.
Dismissing the appeal, the FTT decided that:
the reservation agreement entered into in each of these appeals imposed a personal obligation on the vendor not to negotiate with third parties during the reservation period and was therefore neither an option agreement nor a pre-emption agreement over land, and
as the entry into the reservation agreement was not a land transaction, it could not be a linked transaction with the acquisition of a lease over land.
Although obiter, the FTT also noted that even if the reservation agreement were an option or a pre-emption agreement over land (i.e. over the residential apartment) and even if it were linked with the acquisition of the lease of the apartment, the residential rate of SDLT would have been chargeable in any event since the physical apartment was residential land.
The decision was the same even if, at the time of entering into the reservation agreement, construction of the apartment had not yet begun.
Why it matters: This was yet another, but somewhat novel, attempt to bring a purchase of residential property into the non-residential rates of SDLT. This involved what was a genuine commercial agreement, where a prospective purchaser would pay a fee to reserve a property. The argument was that the reservation fee was an ‘option’ chargeable at the non-residential rates of SDLT. As it was linked to the acquisition of a residential property, that meant that both linked transactions were chargeable at the lower non-residential rates.
The FTT did not accept this, concluding that the reservation agreements were not options within the terms of the SDLT legislation and that the transactions as a whole were chargeable at the residential rate.
On the basis of the appellants’ reasoning in this case, the residential rates of SDLT would have had potentially limited application, as the FTT noted: ‘If the appellants’ arguments in these appeals had been accepted, that might have led to the question whether any purchaser of any residential property could avoid having to pay SDLT at the residential rate, through the simple device of entering into a reservation agreement shortly before contracts are exchanged.’
This decision is well worth reading for those who advise on SDLT. Paragraphs 67 to 78, in particular, review the position on options and rights of pre-emption in the context of SDLT.
