Guidance on the application of Land Transaction Tax in relation to sale and leaseback relief.
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LTTA/7016 Sale and leaseback relief
Sale and leaseback transactions involve a buyer agreeing to purchase a major-interest (freehold or leasehold) in land or buildings from a seller, then that same buyer granting a lease or sub-lease of the land or buildings, or part of them, back to the seller who then becomes the tenant. Both the sale transaction and leaseback transaction are chargeable for LTT. However, subject to certain conditions, sale and leaseback relief provides for the leaseback transaction to be relieved from LTT. Where this relief applies, the sale transaction remains chargeable to LTT.
For sale and leaseback relief to apply to the leaseback transaction, all of the following conditions must be met:
- the sale transaction must be entered into wholly or partly in consideration of the leaseback transaction
- where the sale transaction is partly in consideration of the leaseback transaction, any other consideration for the sale transaction is the payment of money (in any currency) or the assumption, satisfaction or release of debt
- that the sale transaction is not a transfer of rights to a third party or a pre-completion transaction, and
- where both parties are bodies corporate at the effective date of the leaseback transaction, they are not members of the same group for the purposes of LTT group relief.
The sale and leaseback relief is available for both residential and non-residential transactions.
Sale and leaseback relief is available only where the same parties are involved in both transactions. For example, where ‘A’ transfers a property to ‘B’, then ‘B’ leases the property back to ‘A’, ‘A’ must remain the same in both transactions. ‘A’ may be made up of more than 1 person, but if any of these people change between the sale and leaseback transactions, the relief does not apply.
There is no particular requirement for a leaseback transaction to be in consideration of only 1 sale transaction, or for 1 sale transaction to be in consideration of only 1 leaseback transaction for the relief to apply.
The amount of chargeable consideration for the sale transaction will depend upon whether there was a written agreement, at the time of the sale transaction, for the leaseback transaction to be entered into. If there was, the chargeable consideration for the sale transaction should take this encumbrance into account (see example 3 below).
If there is no such agreement, the chargeable consideration for the sale transaction will be based on the unencumbered interest in land (i.e. the value would ignore the leasehold transaction). It should be noted that such an encumbrance may increase, decrease or have no impact on the value when compared to the unencumbered value given that rent may be payable on the leaseback transaction, which would be an income stream for the lessor, as part of the sale and leaseback arrangement.
A Ltd owns a leasehold interest in a commercial property. To raise finance it decides to assign its lease to an unconnected B Ltd in consideration of £1m (the ‘sale transaction’) and a leaseback at market rent of the ground floor only (the ‘leaseback transaction’).
Sale and leaseback relief applies to the leaseback transaction as the relevant conditions are met in this example as follows:
- the sale transaction (transfer by A Ltd) is partly in consideration of the leaseback transaction by B Ltd of part of the property transferred, so is an interest granted out of the interest acquired by B Ltd
- the only other consideration for the transaction is the payment of money
- the sale is not a contracted transfer of rights to a third party or a pre-completion transaction, and
- the companies are not connected for LTT group relief purposes.
Therefore the new sub-lease acquired by A Ltd under the leaseback transaction is relieved from tax.
The sale transaction, assignment of the original lease to B Ltd, is chargeable to LTT in accordance with the rules for exchanges on its market value as encumbered by the new sub-lease. As B Ltd is unconnected, it would be expected that the consideration will, at a minimum, amount to the £1m it was prepared to pay in cash for the sale encumbered by the lease. However, it is also possible that there will be a profit element associated with the head-lease as there is an income stream arising from the new sub-lease acquired by B Ltd, in the form of rents payable by A Ltd. When considering the market value of the encumbered interest acquired from A Ltd that income stream will also need to be considered.
D Ltd owns a leasehold interest in a commercial property. To raise finance it decides to assign its lease to company E Ltd in consideration of £1m (the ‘sale transaction’) and a leaseback at market rent of the ground floor only (the ‘leaseback transaction’). In this example both D Ltd & E Ltd are 100% subsidiaries of C Ltd.
Sale and leaseback relief is not available in this example as one of the conditions is not met - as the companies are in the same group, they are connected for the purposes of LTT group relief at the time of the transaction. Therefore both the sale transaction (the assignment of the head-lease) and the leaseback transaction (new sub-lease) are both chargeable transactions based on the market value of each interest acquired. However, group relief may be available for both elements of the transaction if the conditions in Schedule 16 to LTTA are met.
Individual Ms F owns a freehold property which she wishes to convert into 2 commercial units. To enable her to raise finance, she is required to create leasehold interests in the property. G Ltd is set up by Ms F. Ms F transfers the freehold interest to G Ltd who in turn grants two 999 year leases back to Ms F at no premium and a peppercorn rent. Ms F is then able to assign those 999 year leases to third parties for consideration other than rent to raise finance.
The LTT implications are:
- In these circumstances, the provisions of section 22 LTTA (deemed market value rules where a buyer is a company connected to the seller) would deem the chargeable consideration for the sale transaction to be market value, irrespective of the value of the exchange element.
- The leaseback transaction is an exchange, so the chargeable consideration for the leaseback transaction will be the market value of the interest acquired.
- Any subsequent assignment of the leases by Ms F would be chargeable transactions, based on the consideration other than rent given for the assignment.
In this example all conditions of the sale and leaseback relief are met and therefore the leaseback transaction is relieved.
The sale transaction (transfer by Ms F to G Ltd) is treated as the acquisition of the encumbered freehold by G Ltd. The market value of the encumbered freehold is likely to be negligible (999 year lease granted out of it for no premium and peppercorn rent) so an LTT charge would not arise.
H Ltd, the parent company of a group of companies, owns a freehold interest in a commercial property. To raise finance it decides to sell the property to an unconnected company Y Ltd in consideration of £2m and a leaseback at market rent of the whole of the property.
H Ltd, following the sale transaction, wants 1 of its subsidiary companies, I Ltd, to own the lease and asks Y Ltd to grant the lease to I Ltd.
Whilst H Ltd and I Ltd are members of the same group, they are separate persons in law, and as such the conditions for the sale and leaseback relief are not met because the lease (the leaseback transaction) is granted to a company (I Ltd) that was not the seller (H Ltd) in relation to the sale transaction.
Therefore, both the sale transaction and the leaseback transaction will be chargeable to LTT with consideration for each transaction based on the market value of each interest acquired.
Ms J owns a freehold property. She owns no other property. She has converted the freehold property into 2 apartments (Apartments 1 and 2). They are registered under 1 title and subject to a mortgage.
Ms J lives in Apartment 1 with her boyfriend, Mr K. Apartment 2 is vacant.
Ms J plans to transfer the freehold of the whole property to a company that she has created, of which she will be the Sole Director.
A leasehold for Apartment 1 will then be granted to Ms J and Mr K, who will hold equal shares in the property. They will re-mortgage the property and continue to live in it.
A leasehold for Apartment 2 will be granted to Ms J, who will re-mortgage it under a buy-to-let mortgage. The proceeds of the re-mortgage will be used to redeem the existing freehold mortgage, leaving the freehold unmortgaged.
The leaseback of Apartment 2 (from the company to Ms J) will qualify for sale and leaseback relief (if it meets the conditions outlined above).
However, the lease of Apartment 1 (from the company to Ms J and Mr K) will not qualify for the relief as the seller of the freehold and the lessee are not the same.
Mr L, Mr M, Mr N and Mr O own a freehold property. They plan to transfer the freehold of the whole property to a company that they have created, of which they will be the Sole Directors.
They then plan to lease the property back to Mr L, Mr M and Mr N, but not to Mr O.
This lease transaction will not qualify for sale and leaseback relief. This is because the seller of the freehold (‘A’), as discussed in the guidance above, comprises 4 people, but the lease is only granted to 3 people. The lessees are not therefore the same as ‘A’.