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7. STAMP DUTY LAND TAX (SDLT) / LAND TRANSACTION TAX (LTT) and CAPITAL GAINS TAX (CGT)
7.1 SDLT / LTT in the Context of Islamic Finance
There are usually three stages for each transaction:
(i) the transfer of the property from the Client/seller to the Bank;
(ii) the Lease from the Bank to Client; and
(iii) the transfer from the Bank to the Client on maturity.
On a refinance, all three stages (i) to (iii) are exempt from SDLT under the alternative property financing rules (refer to the Finance Acts). In box 9 of the Return, the answer will be 'yes' and the code will be 24 and boxes 14-15 will be £0.00 as no SDLT will be payable.
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On a purchase, stage (ii) and (iii) are exempt from SDLT under the alternative property financing rules however stage (i) (where it is a transfer from the seller to the Bank) attracts SDLT in the usual way and is payable by the Client.
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If on maturity, if the Client sells the property and the Bank is required to transfer it to a third-party buyer, the buyer will pay SDLT in the usual way. If the Client is not selling the property and the Bank is required to transfer it back to the Client, the Client will not be required to pay SDLT (see paragraph (b) above).
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If the Client is buying a new build property and the developer is unable to grant the lease directly to the Bank, there will be an additional stage (making it four stages). In which case, SDLT is payable on the initial lease/sale from the developer to the Client, and the remaining three stages (i) to (iii) above are exempt.
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HM Revenue and Customs (HMRC) have prepared a guide on the use of alternative property finance relief, which you can access here.
The Land Registry's Practice guide 69 deals with Islamic Finance and SDLT on Diminishing Musharakah at section (3)(2).
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You may also wish to refer to the Finance Acts, which contain provisions on alternative financing and the tax treatment.
7.2 Submitting Returns and Paying SDLT / LTT
You are required to draft and submit all SDLT / LTT returns and pay any SDLT / LTT due to HMRC / The Welsh Revenue Authority (WRA) within the relevant timeframe.
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You will need to provide copies of all returns to the Bank's solicitors to review. You are responsible for ensuring any tax liability has been calculated correctly and that the returns are completed accurately.
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In particular, you must ensure:
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1. The correct reference is used with any payment you submit to HMRC / WRA;
2. Payment of any tax due is made against the correct return;
3. Any relief being claimed is applied correctly;
4. Each return is completed accurately and in full; and
5. All returns and payments are submitted within the required timeframes.
A return is required for each disposal. ​
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In relation to the return where the Bank is the purchaser, you should be noted as the agent. Satisfaction of the conditions precedent relating to SDLT / LTT in the conditions precedent checklist by the Bank’s solicitors may be taken as confirmation you have the Bank’s authority to submit this return on the Bank’s behalf. The Bank will not sign the Return unless you are submitting a postal return.
If you choose not to submit a return in respect of the grant of the lease back to your Client, you will need to submit to HM Land Registry a letter with that application to explain why no SDLT5 has been provided. Land Registry have provided the following example letter that you may wish to adopt.
Dear Land Registry
Property: [full property description of the property in respect of which the lease is granted]
There is no requirement to file an SDLT return where (as in this case) an alternative property finance arrangement has been used to comply with sharia law, and the alternative finance provider pays the SDLT under the arrangement.
In accordance with section 71A(3) of the Finance Act 2003, a second transaction is exempt from charge if the SDLT requirements relating to the first transaction are complied with, including payment of any stamp duty land tax due on the first transaction.
We hereby confirm that the Property has been purchased by [name of tenant under the lease] under an alternative sharia property finance arrangement.
This transaction is the second transaction under the arrangement, and we confirm that all SDLT provisions as required by the Finance Act 2003 relating to the first transaction have been complied with.
Therefore, the second transaction which forms the subject of this lease application is not notifiable and an SDLT return is not required.
Yours faithfully
[lodging conveyancer name]
Where you receive initial instructions from the Bank’s solicitors on or after 1 October 2024:
You will need to retain the SDLT5 certificate for your Land Registry applications.
Where you receive initial instructions from the Bank’s solicitors before 1 October 2024:
You will need to provide the Bank's solicitors with an SDLT5 for each Return in accordance with your completion undertakings.
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Once completion has taken place, the Bank’s solicitors will provide to you via email a URL to an online form. You must complete the online form to provide details of your SDLT / LTT submission within 14 days of completion.
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7.3 SDLT Additional Relief
If you are proposing to use any relief other than code 24 (e.g. group relief or multiple dwellings relief) you are required to expressly provide the Bank's solicitors with a copy of the tax advice received by the Client confirming why the relief has been sought and on what grounds for our information only. The Bank's solicitors may need to refer this to their tax team for comments.
7.4 SDLT Rebates
Please advise your Client that it is their responsibility to trigger the process where an SDLT rebate is applicable. Your Client/your firm should advise the Bank/the Bank’s solicitor as soon as you become aware that a rebate is to be applied for.
7.5 Tax Planning
It is the customer’s responsibility to declare any tax planning at the outset and the Bank reserves the right to take further advice on the same, at the customer’s cost.
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