Death, taxes and childbirth - there's never a convenient time for any of them!

When participating flat tenants acquire the freehold to their building by bringing a collective claim under the 1993 Act via their nominee company it will be taxed on any premium paid in excess of the SDLT threshold. The rate at which SDLT is taxed varies according to the acquisition price of the property – there are tax rates of 1%, 3% and 4% – and perhaps one of the more iniquitous aspects of the SDLT legislation is that participating tenants in effect have to pay SDLT on the price which the nominee company pays.

When SDLT was first introduced in 2003 Parliament clearly intended that each participating tenant should end up paying tax at the rate their individual contribution attracted. This would possibly attract a lower rate of tax or in most cases no tax at all as the individual tenant’s contribution would be below £125,000. To widespread disapproval the Revenue consider this relief is not available because of a technicality. Some practitioners have argued that the nominee company acts as bare trustee for the individual tenant for SDLT purposes and therefore the relevant tax event is the individual participating tenant’s acquisition of a beneficial interest in the freehold and so the relief is de facto in place. This view is disputed by the Revenue.

The surrender of an existing lease for a new lease technically constitutes a CGT disposal and accordingly CGT may arise on any gain a tenant makes on their old lease. This is unlikely to cause concern where the property is the tenant’s main residence – there is an exemption available. The position is more complex however where the property is not a main residence. The Revenue do operate an extra-statutory concession here but the phrasing of the concession casts doubt on its availability in some instances, especially where the new lease is by a nominee company for little or no consideration. It is worth considering whether the new extended lease is taken subject to the old lease rather than the old lease being surrendered. Once the new lease is registered at the Land Registry then the old lease can be merged into the superior title.

Quite complicated
As with most aspects of enfranchisement law what appears on the surface to be straightforward is in fact quite complicated and professional advice should be obtained at the earliest possible opportunity particularly in collective claims to ensure that you achieve the most tax efficient structure for your purchase.