Vary and Pay! The SDLT Transitional Trap
What happens to those property contracts that have already been entered into when the Government announces a SDLT rate change? Unsurprisingly, with off-plan residential properties and agreements for commercial leases being marketed and exchanged far in advance of their respective build date and completion dates, this is a frequently asked question.
With the Spring Budget just around the corner (8 March), and having had a stream of SDLT rate changes and announcements since 2012 in both the Autumn Statements and Spring Budgets, we thought it timely to explain the traditional transitional rules which are usually brought in when a SDLT rate increase is introduced.
Since 2003 the drafting of the transitional rules has remained the same. Broadly, if a contract has been entered into before a specific date, the purchaser's contract is protected (i.e. within the old (typically) lower SDLT rate regime) unless on or after that date there has been:
- any variation of the contract, or assignment of rights under the contract, or
- a transaction effected in consequence of the exercise of any option, right of pre-emption or similar right, or
- an assignment, subsale or other transaction relating to the whole or part of the subject-matter of the contract as a result of which a person other than the purchaser under the contract becomes entitled to call for a conveyance.
HMRC released minimal guidance on the transitional rules when SDLT was first introduced in 2003 and that guidance has only been re-published once in 2016 alongside the publication of the higher rates for additional dwellings (the 3% surcharge regime). The rules are broad and therefore can catch the slightest change made by either party. The guidance suggests there may be a threshold of insignificance as to what is considered a variation such as a change to a prescribed colour scheme or to the contractual completion date, but any change to extent of the land being purchased, the parties to the contract, the length of a lease, the purchase price of rent would be considered a variation pursuant to the transitional rules.
On the face of it, that would seem a sensible division of what would be a significant variation however what happens when you start to consider a different layout of the property or wish to alter the stage payment dates, are those variations as insignificant as changing the shade of the bedroom walls from Brilliant White to Magnolia?
Unfortunately, with no case law, there is no silver bullet when dealing with proposed variations to a contract. Whilst every scenario will be fact dependent, the use of may by HMRC in its guidance emphasises the uncertainty of when the transitional rules apply. To err on the side of caution and avoid paying additional SDLT (plus late interest and penalties) if a contract has been exchanged before the specified date and the rates you wish to take advantage of are subject to transitional rules, we strongly advise you not to make any change (informal or otherwise) and proceed to completion with the contract in identical form to that which you exchanged!