SDLTM16040 - Reliefs and Exemptions: Sale and leaseback arrangements

The provisions of section 57A Finance Act 2003 apply for a sale and leaseback arrangement means an arrangement under which:

  • A transfers or grants to B a major interest in land, (the sale), and
  • out of that interest B grants a lease to A (the leaseback).

As this transaction is an exchange, both parts of the transaction are, under the provisions of section 47 Finance Act 2003, chargeable on the greater of either the market value of the interests transferred or the consideration given (see SDLTM04020). However, where all the conditions of S57A (3) are met, the leaseback element will be exempt. These conditions are:

  • the sale transaction must be entered into wholly or partly in consideration of the leaseback
  • the interest leased back must be an interest out of the original interest
  • the sale leg must be in wholly or partly in consideration of the leaseback, where partly the only other consideration is the payment of money or release from/assumption of a debt
  • there is no transfer of rights under section 45 or 45A FA03 involved in the transaction and
  • where A and B are both bodies corporate at the effective date they are not members of the same group for the purposes of group relief (paragraph 1 Schedule 7 Finance Act 2003).

Irrespective of whether relief for the leaseback is claimed, the chargeable consideration for each leg is determined by the exchange rules at FA03/S47 and FA03/SCH4/PARA5 . (SDLTM04020)

The chargeable consideration for the sale leg will depend upon whether there was a written agreement, at the time of the sale, for the leaseback leg to be entered into. If there was, the chargeable consideration for the sale leg should take this encumbrance into account (see SDLTM04020a, example 3) . If there is no such agreement, the chargeable consideration for the sale leg will relate to the unencumbered interest in land.

As a consequence of amendments inserted by FA 2004, the scope of the relief has been extended so that it now applies in circumstances where the sale is effected by the grant of a lease followed by an underlease back. The relief is also available in respect of sale and leaseback transactions in residential property. The leaseback element of an equity release or home reversion transaction may benefit from relief if all the qualifying conditions are met.

There is no particular requirement for a leaseback to be in consideration of only one sale, or for one sale to be in consideration of only one leaseback for the relief to apply. It is possible to have one sale with multiple leasebacks and also to have several sales with only one leaseback.

Refer to legislation at:

  • FA03/S57A
  • FA04/S296
  • FA04/SCH39/PARA16

Example 1

Individual A owns freehold property which he wishes to convert into two commercial units. To enable him to raise finance, he is required to create leasehold interests in the property. Company (B) is set up by A. A transfers the freehold to the company who in turn grants two 999 leases back to A at no premium and a peppercorn rent.

SDLT implications:

  • The transaction is an exchange so the chargeable consideration for each transaction will the greater of firstly the market value of the interest acquired and secondly the consideration given for the interest acquired. (In these circumstances, the provisions of S53 would also deem a chargeable consideration for the sale leg to be not less than market value, irrespective of the exchange element.)
  • Are the conditions of section 57A(2) & (3) met?

If the conditions are met, the leasebacks are exempt. The transfer by A to B is treated as the acquisition of the encumbered freehold. Given the facts in this case, the market value of the encumbered freehold is likely to be negligible and there was no consideration given so an SDLT charge would not arise (see SDLTM04020 and example 3 of SDLTM04020a. If the conditions are not met the transfer then the leases back will be chargeable. They will fall under the exchanges rules as the leases appear to have been consideration for the transfer of the freehold. The treatment of the A to B transfer is unchanged.

Example 2

Company A owns a leasehold interest in a commercial property, to raise finance it decides to assign its lease to an unconnected company B in consideration of £1m and a leaseback at market rent of the ground floor only.

Section 57A applies as the transfer by A is in consideration of the leaseback by B of part of the property transferred so is an interest granted out of the interest acquired. The only other consideration for the transaction is the payment of money, there is no section 45A or Schedule 2A transaction and the companies are not connected for group relief purposes, so relief will be available on the leaseback.

The assignment of the original lease to B is chargeable in accordance with the rules for exchanges (see SDLTM04020 and SDLTM04020a) on the greater of the £1m given or its market value as encumbered by the new lease.

Example 3

Company A owns a leasehold interest in a commercial property, to raise finance it decides to assign its lease to company B; both A & B are 100% subsidiaries of C, in consideration of £1m and a leaseback at market rent of the ground floor only.

Section 57A does not apply as the companies are in the same group at the time of the transaction, so both the assignment and the leaseback are chargeable on their market value. Group relief may be available for both elements of the transaction if the conditions of paragraphs 1 & 2 Schedule 7 Finance Act 2003 are met, but the withdrawal provisions of paragraph 3 must also be considered.