This is a chapter from Professor McDonald's Conveyancing Manual, which provides full coverage of property and conveyancing law. Its coverage includes preliminary matters such as authentication, capacity and delivery; dispositions including the feudal background and registration; regulation of landownership, including a thorough examination of title conditions; securities and leases; and, transmissions, for example completion of title. It also contains an appendix of an Agricultural Lease. The book combines the academic with the practical, making it essential for both practitioners and LLB students.
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Table of Contents
Stamp duty land tax (SDLT) was introduced in the Finance Act 2003 as a virtually total replacement for stamp duties. This followed what was (for tax matters) a relatively long and detailed period of consultation, during which the replacement tax appeared under the rather more accurate name of 'land transaction tax'. It was made clear that the part of the intention behind the new legislation was to counter what was perceived as substantial avoidance of stamp duty.
SDLT affects transactions which settle on or after 1 December 2003, including those for which there was a contract concluded after the date on which the Finance Act received Royal Assent, 10 July 2003. Transactions settled before 1 December 2003, or those settled on or after that date in pursuance of contracts concluded before 11 July 2003, continue to be governed by the rules on stamp duty.
In these circumstances, it is appropriate first to outline the rules on SDLT in more detail than those on stamp duty. However, as stamp duty will remain relevant when looking at titles for some years to come, the treatment of SDLT is followed by some brief details on its predecessor.
The basic legislative framework for SDLT is found in Part 4 of the Finance Act 2003 (ss 42 to 124), backed by Schedules 3 to 19. More detail is supplied by regulations made under various of the primary provisions, which were not published until shortly before the new tax came into force. The regulation-making power is extremely wide and it is possible that even quite fundamental rules about the tax will be altered by regulation.
Unlike stamp duty, SDLT is a tax on land transactions. It applies whether or not there exists any instrument to effect the transaction; whether or not any instrument is executed in the UK; and whether or not any party to the transaction is present or resident in the UK: see Finance Act 2003, s 42(2).
A land transaction means any acquisition of a chargeable interest: Finance Act 2003, s 43(1). A chargeable interest is defined extremely widely: Finance Act 2003, s 48. It means an estate, interest, right or power in or over land in the United Kingdom, or the benefit of an obligation, restriction or condition affecting the value of any such interest, right or power. Certain interests are designated as exempt. The ones relevant in Scotland are any security interest; and any licence to use or occupy land. There are other exemptions, however (see below).
It is also made clear that the creation, renunciation or variation of a chargeable interest are all to be treated as acquisitions of chargeable interests; and that in all those cases the person benefiting from the transaction is to be treated as the purchaser under a land transaction. The tenant under a lease will thus be treated as a 'purchaser' for the purposes of SDLT.
Special provision is made under the Finance Act 2003, s 44, for situations where a land transaction involves both a contract and a conveyance, as will most sales of land in Scotland, with missives to be followed by a disposition. In general, the contract will not be treated as a separate land transaction – there will be a single land transaction for which the effective date will be the date of settlement.
However, if the contract is substantially performed before it actually settles or completes, then that substantial performance becomes the effective date of the transaction. 'Substantial performance' takes place where the purchaser (as widely defined, above) takes possession of the whole, or substantially the whole of the subject matter of the contract or a substantial amount of the consideration is paid.
If such a contract is later completed, that completion will also be a notifiable transaction, but any tax paid on the earlier substantial performance can be set off against that due on completion. If the contract is later annulled, tax can be repaid.
In effect, these new rules mean that there may be a tax point much earlier than that which applied under stamp duty, which could not arise until the appropriate conveyance had been executed.
It is also made clear that the creation of options and rights of pre-emption are themselves land transactions, distinct from the exercise of the option or right of pre-emption. This appears to mean that the creation of a right of pre-emption for the seller in a sale transaction would involve two land transactions: the obvious one, in which the acquirer is the purchaser; and the creation of the pre-emption, in which the purchaser (of that right) would be the seller of the land.
Excambions (or exchanges) are very clearly to be treated as two distinct land transactions.
Extensive provision is made to establish the consideration which is to be subject to SDLT. It certainly includes 'any consideration in money or money's worth given for the subject matter of the transaction, directly or indirectly, by the purchaser or a person connected with him': Finance Act 2003, Schedule 4, para 1(1).
Value added tax will be included if it is chargeable in respect of the transaction – but not if it can only be charged by virtue on an election to waive exemption after the effective date of a transaction (see below). This is a slight relaxation from the rule under stamp duty.
If payment of the consideration is to be postponed, there will generally be no discount for that postponement.
It may be necessary to make apportionments in relation to consideration, where part of that consideration relates to a chargeable land transaction and part does not. This apportionment has to be made on a just and reasonable basis. The most obvious example of this is on the sale of a house along with some moveable contents. It is even clearer under SDLT than under stamp duty that the attribution of part of the overall purchase price to moveable items (on which SDLT will not be payable) will have to be on a reasonable and justifiable basis – and, if necessary, that attribution will require to be justified.
Clearly, there can be consideration other than money. In general, non-monetary consideration will be valued at its open market value. Special provision is made for such relatively unusual consideration as debt, foreign currency, the carrying out of works, the provision of services, the payment of an annuity and the creation of obligations under a lease.
If consideration is contingent, it has to be assumed that the contingency leading to the payment of the consideration will occur; if chargeable consideration is uncertain or unascertained, a reasonable estimate requires to be made: Finance Act 2003, s 51. There are provisions for adjustments to be made when the position becomes more certain, which could lead to the payment of additional tax or a repayment by the Inland Revenue: see Finance Act 2003, s 80.
The amount of SDLT payable is a percentage of the chargeable consideration, now rounded down to the nearest whole pound of tax. In the case of consideration other than rent under a lease, the size of this percentage depends on the total amount of consideration, either in relation to the transaction in question on its own, or in relation to that transaction along with any linked transactions (see below).
The percentage is 0% where the consideration falls below a set threshold. There is now a differentiation between that threshold as it applies to residential property as compared to where it applies to non-residential or mixed property. In the former case, as at 1 December 2003, the 0% threshold was set at £60,000; whereas for non-residential or mixed property it was set at £150,000.
It is thus necessary to have a definition of 'residential property'. This is found now in the Finance Act 2003, s 116. The general definition revolves round the concept of a building being used or suitable for use as a dwelling. Certain buildings are then specifically defined as being used as dwellings, such as residential accommodation for school pupils; and others are specifically defined as not being used as dwellings, such as children's homes, hospitals, hospices, prisons and 'a hotel or inn or similar establishment'. It can be seen that there are some grey areas in such definitions, doubtless to be resolved in due course. There is also an extension of the non-residential category to include transactions involving six or more dwellings.
Beyond the 0% threshold, the percentage rates of tax are set at the same levels for residential and non-residential property. From 1 December 2003, for consideration between the 0% threshold and £250,000, the rate is 1%; for consideration between £250,000 and £500,000, the rate is 3%; and for consideration in excess of £500,000, the rate is 4%.
In this context, it is necessary to look at the consideration for all 'linked transactions'. This is a new concept for SDLT, but it extends a rule which was in place for stamp duty. Transactions are 'linked' if they form part of a single scheme, arrangement or series of transactions between the same vendor and purchaser or persons connected with them, with 'connection' being very widely defined in keeping with other tax provisions: see the Income and Corporation Taxes Act 1988, s 839.
For instance, under stamp duty, if there was a single sale of one piece of land for £100,000 between two individuals, it is not permissible to split this into two transactions between the same two parties, each for £50,000 and apparently below the 0% threshold. However, the position may have been different where there were actually two transactions, perhaps involving related but separate parties (such as husband and wife) on one or both sides of the transaction. The intention of the new concept is apparently that these transactions would be treated as linked and charged to tax at the rate appropriate to the total consideration. Under stamp duty law, there was the same restriction on a 'series of transactions' being treated as separate and this has been subsumed into the new concept of linked transactions: on this aspect, see Cohen v Attorney General  1 KB 478. The exact scope of the new concept will doubtless become clearer in due course.
Leases were treated differently under stamp duty and also receive separate consideration under SDLT. However, these rules in particular changed before their introduction on 1 December 2003.
Premiums and other capital payments in relation to leases are simply treated in the same way as consideration for other land transactions, with an exception where the annual rent exceeds £600 a year. (In that case, the 0% thresholds for consideration do not apply and consideration within these thresholds will instead be taxed at 1%.)
Rent is treated differently. It is taxed at 1% of the amount by which the 'net present value' of the rent exceeds specified thresholds, these being £60,000 for residential leases and £150,000 otherwise. No tax is charged on the present value within these thresholds. The calculation of the net present value is quite complex – it requires taking the total rent payable over the term of the lease, but applying an annual discount for the rents to be paid in and beyond the first year. An online calculator will be available from the Inland Revenue.
Provision is made to exclude the effect of rent reviews and other charges more than five years after the commencement of the lease; and there is a range of anti-avoidance provisions.
In Scotland, special provision is made to define the 'completion' of a lease, as being when it is signed by the parties (presumably by the last of them, if different dates are involved), or constituted by any means (which would cover oral leases and missives of let without a formal lease). The date of completion is important is determining when SDLT becomes due.
A number of exemptions and reliefs are provided from SDLT, quite apart from transactions excluded from its scope altogether, such as those involving securities and licences. Among the most important are:
(1) exemption for transactions where there is no chargeable consideration. Thus gifts are generally exempt from SDLT, but gifts subject to accepting liability for a debt will be chargeable;
(2) exemption for transactions in connection with divorce;
(3) exemption for transactions deriving from the variation of testamentary dispositions within two years of death;
(4) exemption for purchases by charities and certain bodies established for national purposes (although there are anti-avoidance provisions attached);
(5) relief for transactions involving land in so-called 'disadvantaged areas'. This provides complete exemption where the property is all non-residential. Where residential property is involved, the consideration must not exceed £150,000, whether in the form of price or the net present value of the rent.
Disadvantaged areas are defined in Scotland by postcode. The Inland Revenue maintains a website which is of assistance (but which is not conclusive) in establishing whether this relief is available. This is www.inlandrevenue.gov.ukso/pcode_search.htm.
(6) exemption for transactions between companies within the same group. This relief is subject to a range of complex definitional provisions; and to clawback in a number of circumstances, notably where the recipient company ceases to be a member of the same group as the transferor within three years of he effective date of the transaction;
(7) exemption where a reconstruction of a company is involved; and reduction of the rate of duty to 0.5% where the acquisition of an undertaking of a company is involved. Both of these are subject to a range of conditions and possible clawback;
(8) exemption for the grant of certain leases by registered social landlords, in Scotland under s 57 of the Housing (Scotland) Act 2001;
(9) relief for exchanges involving house-building companies;
(10) exemption for certain purchases by employers or relocation companies where this results from the relocation of an employee and various other conditions are met;
(11) exemption for compulsory purchases facilitating development;
(12) exemption for purchases by public authorities where these arise to comply with a planning obligation;
(13) exemption for certain transfers following the incorporation of a limited liability partnership;
(14) exemption for various reorganisations of public bodies under statute; and
(15) relief where the crofting community right to buy (under Part 3 of the Land Reform (Scotland) Act 2003) is exercised, allowing the total consideration to be divided by the number of crofts being bought when establishing the rate of SDLT to be charged.
The purchaser is required to deliver to the Inland Revenue a land transaction return in respect of every notifiable transaction within 30 days after the effective date of a transaction (generally the date of settlement). As with other tax matters, this return must include a self-assessment of the SDLT that is chargeable.
Most transactions are notifiable. These include all acquisitions of major interests in land (that is, ownership or the right of a tenant), but with the exception of some leases for a term of less than seven years. Also excepted are exempt transactions in categories (1), (2), (3) and (7) above.
Transactions other than the acquisition of a major interest are only notifiable if there is tax chargeable at a rate of 1% or higher.
The return is a six-page form (SDLT 1), with pay-slip attached. Further details are required on supplementary forms in certain cases, notably where a new lease or a purchase by a company is involved. The form requires to be signed by the purchaser himself (with an agent's signature being insufficient unless under Power of Attorney), which is a very different requirement than existed for stamp duty, although there is some provision in connection with those who lack capacity.
Where there is more than one purchaser involved in a single transaction, only one return is required.
After completion, the form requires to be sent to a central Inland Revenue address. Provisions are to be introduced for electronic submission and payment.
Payment is made an explicit liability of the purchaser, with joint and several liability applying to purchasers in common.
There can be an application for deferment of payment where the consideration is contingent or uncertain.
When the form has been completed correctly, submitted and payment has been made, the Revenue will issue a certificate confirming compliance with SDLT requirements. In cases where a return is not required, a certificate is required to be completed by the purchaser to this effect (appropriate wording has been issued in Regulations, along with further details about the returns and certification).
It is only on production of this certificate that the Keeper will accept any document for registration in any register maintained by him including the Books of Council and Session. This is a very important encouragement to compliance with SDLT.
Special arrangements are being made to allow personal presentation in certain cases, to prevent the delay and risk which would ensue from awaiting return of the certificate through the post or other delivery method.
The legislation contains a vast amount of regulatory provisions on the administration of the tax, mostly imported directly from other tax regimes. There are rules on the duty to keep and preserve records; on the power of the Revenue to make enquiries and to make determinations where no return is delivered; on the power of the Revenue to make assessments; and in relation to appeals against Revenue decisions on the tax.
The various regulatory requirements are supported by provisions for interest and penalties for failure to pay the tax or to comply more generally – for instance, by supplying incorrect information. There are also extensive and detailed provisions allowing the Revenue to obtain information in relation to tax compliance. These are of particular importance in relation to solicitors involved in the completion and submission of returns, given their professional obligation of confidentiality of their clients.
On or after 1 December 2003, stamp duty will continue to apply to instruments relating to stock or marketable securities: see the Finance Act 2003, s 125.
Rather more surprisingly, stamp duty in its unamended form continues to apply to the transfer by partners or prospective partners of land into and out of partnerships; and to the acquisition of partnership interests. Such transactions are excluded from stamp duty land tax. On this aspect, see the Finance Act 2003, Schedule 15, and Part 3 of the Act.
In conveyancing terms, it may of course still be important to be aware of whether a document was properly stamped. There follows a brief discussion of the rules on stamp duty. Further details can be found in previous editions of this book.
Stamp duty is simply one form of taxation. All the older taxing provisions were consolidated and re-enacted in two principal Acts: the Stamp Act of 1891, which imposed the duties, and the Stamp Duties Management Act 1891, which dealt with administration. Much of the former Act was replaced by new provisions in the Finance Act 1999, although intervening Finance Acts had already substantially altered the 1891 provisions.
Stamp duty was (and remains) a tax on documents; no document, no duty. This leads to a further point. Stamp duty was only payable when expressly imposed in terms of the relevant Act. Sometimes it was possible, by framing a document in one way, to avoid paying stamp duty which would be chargeable on that document were it framed in another way. Provided that the writ as framed achieved its purpose, and that there was no concealment or distortion of the facts, it was perfectly legitimate so to frame it that stamp duty was altogether avoided or perhaps was payable at a lesser rate. Care was required because the Inland Revenue has the power to request sight of all antecedent relevant documents. This type of possibility is now much restricted under stamp duty land tax, where the tax is due in respect of the transaction itself rather than being dependent on the mere forms of document used in the transaction.
The duty was paid by way of impressed stamps, which involved the lodging of the document with the Revenue for stamping, together with the duty itself. As a precaution against evasion, every document (if liable) required to have the stamp duty impressed thereon within 30 days after execution. In practice, where there were several parties to a deed, the time limit ran from the date on which the last party signed.
To ensure that in every case the duty was paid when due, two separate sanctions were imposed:
(1) that a document which was not duly stamped was not admissible as evidence in any civil action (this rule no longer exists under SDLT); and
(2) that any document not timeously stamped incurred a penalty over and above the duty due, when eventually presented. The penalty could be up to £10, plus the amount of the duty, plus interest. But this potentially large amount was normally remitted in whole or in part.
These two provisions were essentially complementary. The effect, with certain limited exceptions, was not to render an unstamped document invalid, because (with few exceptions) any document might be presented out of time for stamping. But if so, then the second proviso operated, and a penalty was payable in addition to the duty. The result was that, if you ever have to found on an unstamped document in any action, the court would not reject it out of hand, but would insist that it be properly stamped, before considering its terms; and that of course means payment of duty, plus penalty.
Fines were also imposed in limited circumstances. It followed that a writ which was insufficiently stamped would not be accepted for registration, nor as a link in title by any agent. Nor would the Revenue, for income tax and other purposes, accept a writ as effective unless it were stamped. This, in practice, was sufficient to ensure, in a great number of cases, that stamping was timeously effected.
Two methods were used to arrive at the actual duty payable on any particular document. These were either a fixed duty of a stated amount for the particular document regardless of the value of the property to which it relates; or ad valorem duty, calculated as a percentage on the amount involved. A disposition (a conveyance) might carry either fixed duty of (most recently £5, raised from 50p from 1 October 1999), or ad valorem duty calculated by reference to the price paid for, or the value of, the property conveyed; it would depend on circumstances which mode of fixing the duty applied.
After various reforms, fixed duties were removed from a very large number of documents, especially when they could be certified under the Stamp Duty (Exempt Instruments) Regulations 1987, SI 1987/516, as being within one of the various categories specified. Ad valorem duties were (as a general rule) fixed, not according to the type of document, but according to the nature of the transaction. The most important was conveyance on sale duty, which was imposed on every instrument and every decree of court whereby any property was, on sale, transferred to a purchaser. This extended to every form of property, not merely land.' Sale' necessarily involves some element of consideration, and it was the value of the consideration on which (as a rule) the amount of duty was based.
The deed on which the duty was charged was normally the conventional document whereby the actual transfer was effected, for example, on sale of land, the disposition; on sale of stock, the transfer. But, in many cases, other documents were found liable under this head because they in fact effected a conveyance on sale, though not in conventional form. The emphasis was on the nature of the transaction, not on the nature of the deed.
The rate of duty in the original Stamp Act 1891 for all conveyances on sale was 10 shillings per £100 of consideration. There have been frequent alterations to the basic rate in subsequent Finance Acts and on the virtual abolition of stamp duty in 2003, the rate on sale was the same as the first imposed rate of stamp duty land tax (see above). Although of no significance now from the point of view of stamping a deed, it may be important to know the various rates of duty from time to time in force in the past when examining a heritable title, because one of the things you have to check is that each writ in the title is properly stamped.
Since reduced rates were introduced (including a zero rate for consideration below a stated threshold), it has been required to qualify for the exemption or for the reduced rates from time to time in force that the deed contained a certificate of value. If the clause was not included, the full rate was exigible, no matter how small the consideration. The clause certified that 'the transaction hereby effected does not form part of a larger transaction or of a series of transactions in respect of which the amount or value or the aggregate amount or value of the consideration exceeds [a stated limit]'. This was designed to prevent evasion of duty by breaking down a single large transaction into a number or series of smaller transactions.
There were special rules, which changed over the years, to deal with excambions (exchanges) of property. These have been tightened up under stamp duty land tax.
There were a number of special rules and exemptions on (for instance) transfers to charities, voluntary dispositions and testamentary documents, most of which are carried forward to stamp duty land tax.
The Revenue, if required, would adjudicate the stamp duty on any document, and in certain cases adjudication was obligatory. If adjudicated and duly stamped, the document was impressed with a further stamp, in addition to the duty, called an adjudication stamp. That was then conclusive evidence that the proper duty had been paid.
There was a general obligation under the Stamp Act 1891, s 5, to set out all material facts relevant to stamping in the body of the deed and, where this was done, adjudication was normally unnecessary. But if the case was complicated, then adjudication was appropriate.
Denoting stamps were a method of marking a document to the effect that the correct stamp duty had been paid, usually on another document linked to the one on which the denoting stamp was placed.
The rules relating to VAT in the UK are complex. It is not the intention here to give detailed information as to the applicability of VAT, but rather to provide a general outline of some of the more common areas when a professional adviser acting for a commercial client will require to consider VAT implications.
VAT was introduced into the UK in 1973 as a result of joining the European Community. It has its origins in Article 99 of the 1957 Treaty establishing the European Economic Community which requires a 'harmonized system of indirect taxes' to prevail throughout the Community.
The VAT rules applicable to land and property transactions were changed in the Finance Act 1989, as a result of a judgment of the European Court handed down on 21 June 1988, which decided that the UK had not implemented its obligations under an EEC directive with regard to VAT provisions. Introduction of these rules has led to numerous anomalies, which consequently make it difficult for advisers to extract general principles.
VAT will not be applicable on the normal domestic conveyancing transaction. However, when considering the sale or purchase of land and/or property by a commercial client, or a leasehold transaction, VAT will be an element that will require to be considered.
If a commercial client buys, sells, leases, licenses, rents or hires out land or buildings or parts of a building on a regular basis, then he will be seen as acting in the course or furtherance of a business, and the VAT liability of the supply will require to be considered. Property development or redevelopment on a 'one off' basis is also seen as carrying on a business for the purpose of VAT.
Supplies are categorised for VAT purposes into taxable and exempt supplies. Taxable supplies fall into three categories:
(1) zero-rated supplies;
(2) standard-rated supplies, which are those on which VAT is paid at the current rate of 17.5%; and
(3) reduced-rate supplies, which are those on which VAT is paid at the reduced rate of 5%. (In the present context the reduced rate is only relevant to supplies of certain energy-saving materials.)
However, supplies made in the course of the transfer of a business as a going concern are outside the scope of VAT entirely: see the Value Added Tax (Special Provisions) Order 1995, SI 1995/1268. The concept of 'business' can include a let investment property.
The difference between taxable and exempt supplies is that input VAT (VAT on expenses for the business) related to taxable supplies may be recovered whereas input VAT related to exempt supplies is in principle not recoverable.
Prior to 1 April 1989 the supply of an interest in land and buildings (sale or lease) was exempt with certain exceptions. The supply of a major interest in a building by the person constructing the same was zero-rated. 'Major interest' meant an outright transfer of ownership or lease for more than 21 years. The provision of construction services for the construction of a new building was also zero-rated. After 1 April 1989 the position changed substantially.
Zero-rating is now restricted to prescribed instances in which a supply has as its subject a 'qualifying' building. 'Qualifying' buildings include a dwelling or group of dwellings, but excludes those which cannot be occupied throughout the year by the person to whom the grant is made, such as timeshare accommodation. The sale of timeshare accommodation is standard rated where the property involved was −completed less than three years before the sale, and is otherwise exempt. 'Qualifying' buildings also include a building or part of a building to be used for charitable purposes; and a residential building or residential part of a building which will be used as inter alia a children's home or a home for old or disabled persons. The person −constructing such a qualifying building can zero rate the supply of such a building provided that the undernoted conditions are met.
(1) The building must 'qualify' as explained above.
(2) A certificate of proposed use must be obtained from the purchaser or grantee where the intended use is for relevant residential or relevant charitable purposes.
(3) A major interest in all or part of the building must be granted.
(4) The supplier must qualify as the person constructing the building and, with effect from 1 March 1995, the supply must be the first grant of a major interest.
(5) The building formerly required to be new but, since 1 March 1995, a non-residential building converted for a residential or other qualifying purpose would also generally attract zero-rating.
A major interest includes a grant of the dominium utile or a long lease – one which is capable of exceeding 20 (now reduced from 21 years to ensure consistency with the normal definition of a long lease).
Any supply of a qualifying building which does not meet these criteria will be exempt.
Note that if, within ten years of its completion, a zero-rated qualifying building (other than a dwelling) is used for non-qualifying purposes, the then owner or tenant must account for VAT.
Any sale of a new 'non-qualifying' building will be standard rated for VAT. 'New' is defined as up to three years old from the date of first occupation or the date of practical completion (whichever is the earlier).
All supplies of buildings or land which do not meet the criteria to be zero-rated, as discussed above, and which do not fall to be standard rated will be exempt with the option to tax (see below).
The election to waive exemption (or option to tax) for a supply which is otherwise exempt, is now to be found in paras 2 to 4 of Schedule 10 to the Value Added Tax Act 1994. Subject to the rules, the option to tax means that if it is exercised by the supplier, supplies which would otherwise be exempt will become taxable at the standard rate. Thus a landlord of non-residential property, any supply of which is exempt, can waive this exemption and opt to tax the rental income received by him, whereupon VAT will become payable on rents. Similarly the seller of used non-residential −property which does not 'qualify' for zero-rating and is not mandatorily standard rated can opt to tax the property whereupon VAT will become payable on the sale price. However, the Finance Act 1997 contains provisions restricting the option. Its effects are removed where the developer of property which falls within the Capital Goods Scheme makes a grant in relation to the property, with the intention or expectation that the property would be occupied other than mainly for taxable business purposes by the grantor, or a person funding the development, or a person connected with either of them. This complicated anti-avoidance provision has been extended further by later Finance Acts.
This option is virtually irrevocable, although provisions were introduced in 1995 allowing an option to be revoked in certain circumstances within less than three months, or after more than 20 years, of its exercise. Subject to this, once the option has been exercised for a given building or area of land, the choice is binding for all future supplies by the person exercising the option; after a change of ownership the new owner has the right to exercise the option or not as he chooses. Therefore while a property remains in the ownership of the person who has exercised the option the rents cannot be taxed without taxing any subsequent sale. Furthermore, if the option is exercised, it must be exercised for a building as a whole. Customs and Excise treats buildings linked internally or by a covered walkway as single buildings for the purposes of the option to tax. Certain buildings, including private dwellings, and all other 'qualifying' buildings cannot be the subjects of an option to tax. Further, supplies of land to D.I.Y. homebuilders or to housing associations for the construction of dwellings cannot be subject to the option.
The option takes effect from the beginning of the day on which it is exercised, or at a later date if specified. The option can be exercised without prior consultation with tenants or a purchaser, no matter what the stage of the transaction. If negotiations have proceeded on the basis that the building is exempt, then the purchasers must obtain a binding undertaking from the seller not to exercise the option. If a seller exercises the option, VAT becomes payable on the purchase price. If an agreement has been entered into which is silent on VAT, the VAT payable as a result of the exercise of the option will be payable in addition to the agreed price. Given that the option can be exercised at any time, these issues should be resolved prior to conclusion of missives: on this aspect, see Jaymarke Developments Ltd v Elinacre Ltd 1992 SLT 1193 and Hostgilt Ltd v Megahart Ltd  STC 141.
If an option to tax is exercised, input tax relating to the supply, such as VAT on land purchases and construction costs, can be recovered. However, disadvantages include the indirect effect on the residual value of the property, together with the irrevocable nature of the option. Furthermore, opting to tax when dealing with a building that will subsequently be leased will mean that subsequent rents will be subject to VAT. Potential tenants may include those not subject to the VAT regime who would thus be unable to reclaim their input VAT.
The Inland Revenue issued a Statement of Practice on 12 September 1991 highlighting the interaction between stamp duty and VAT. A number of points arise from this Statement of Practice which should be borne in mind and are still likely to be applicable in relation to stamp duty land tax.
(1) For stamp duty land tax purposes, on sale of a new non-domestic building, the amount or value of the consideration is the gross amount inclusive of VAT. Therefore, where VAT is payable on the sale of new, non-residential property, stamp duty is calculated on the VAT inclusive consideration. This point was confirmed in Glenrothes Development Corporation v Inland Revenue Commissioners 1994 SLT 1310.
(2) As discussed above, certain transactions with non-residential property other than the sales of new buildings are exempt from VAT. However, where the seller or landlord opts to tax, then:
(a) where the election has already been exercised at the time of the transaction, stamp duty land tax is chargeable on the purchase price, premium or rent (depending on the transaction) including VAT;
(b) where the election has not been exercised at the time of the transaction, for stamp duty purposes VAT had to be included in any payments to which an election could still apply. This used to mean that there was a VAT element in the stamp duty charge in cases where an election to waive the exemption has not been exercised but it was still possible to exercise it. However, with effect from the introduction of stamp duty land tax, SDLT will not be chargeable unless the election is actually made before the effective date of the transaction;
(c) where VAT is charged on the rent under a lease, subject to certain considerations, stamp duty land tax will be charged on the VAT inclusive figure for the net present value. The rate of VAT in force at the effective date of the lease will be used in the calculation;
(d) where there is a formal Deed of Variation varying the terms of a lease so as to provide payment of VAT by way of additional rent, further stamp duty land tax will be payable.