15% SDLT: developer exclusion far too narrow

It seems like good news that the 15% SDLT rate on certain transfers of residential property announced in the Budget does not apply to property developers. However, property developer for these purposes is very narrowly defined as (a) a company that acquires high value property in the course of a “bona fide property development business” for the sole purpose of developing and re-selling the land; and (b) that company has carried on that business for at least two years before the land has been acquired.

The second limb is unrealistically narrow because most developers will generally establish a clean company to carry out developments. Even if a developer were prepared to use a pre-existing “dirty” company, financing banks are likely to object to these being used as borrowers.

Developers will generally also use separate SPVs for each development in order to maximise flexibility in terms of borrowing from different banks without inter-creditor issues arising and to ring-fence liability and limit development risk.

Using separate clean SPVs for development is, therefore, standard commercial practice.  However, such companies will not satisfy the two year requirement and under the current drafting genuine developers of high-end residential property may, therefore, face an unexpected 15% SDLT charge.

There is a draft provision that seems intended to deal with intra-group transfers of existing businesses but it does not appear wide enough to cover newly acquired sites bought directly by SPVs. Developers should consider making representations about the draft measures as the definition is deeply misguided. One easy solution may be to widen the two year condition so that it can be satisfied by the group as a whole rather than each individual company.

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Elizabeth Bradley

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