In most cases LBTT is calculated on the actual consideration paid on a land transaction rather than the deemed market value. However, where the buyer in a land transaction is a company and the seller is connected to the buyer, the chargeable consideration for the transaction will be not less than the market value (see LBTT2016) of the property at the effective date or, if the transaction involves the grant of a lease, then the chargeable consideration is to be taken as not less than the rent. The tax calculation may therefore be based on a value greater than the consideration (if any) actually being paid.
The same rule about the chargeable consideration applies where a seller (individual or company) transfers property to a buyer (company) and some or all of the consideration for that transfer consists of the issue or transfer of shares in a company with which the seller is connected.
The general rule that transactions with no chargeable consideration are exempt for LBTT (see LBTT3003) does not apply to land transactions falling within this rule. But transactions are still subject to any other applicable provision affording exemption or relief from LBTT.
Section 1122 of the Corporation Tax Act 2010 applies to determine whether the seller is ‘connected’ to the buyer. Shares include stocks and the reference to shares in a company includes a reference to securities issued by a company.
There are three exceptions to the deemed market value rules for connected companies. The rules do not apply in the following cases.
Case 1 is where immediately after the transaction the company (the buyer) holds the property as a trustee in the course of a business carried on by it that consists of, or includes, the management of trusts.
Case 2 is where
(a) immediately after the transaction the company (the buyer) holds the property as trustee, and
(b) the seller is connected with the company only because of section 1122(6) of the Corporation Tax Act 2010.
Case 3 is where
(a) the seller is a company and the transaction is, or is part of, a distribution of assets (whether or not in connection within its winding up), and
(b) within the three years immediately preceding the effective date –
- the subject matter of the land transaction, or
- an interest from which that interest is derived,
has not been the subject of a transaction for which the seller has claimed LBTT group relief.
If any of these exceptions applies, LBTT will be charged on the actual consideration paid.
Chargeable consideration and tax payable where A is not connected with company B
A, is not connected with company B in accordance with section 1122 of the Corporation Tax Act 2010.
The chargeable consideration is therefore the amount paid, in this case £170,000. The LBTT payable is £500, and the ADS payable is £10,200 using the current residential rates and bands.
If the chargeable consideration was nil, this would be an exempt transaction under Paragraph 1, Schedule 1
Chargeable consideration and tax payable where A is connected with company B
A, is connected with company B in accordance with section 1122 of the Corporation Tax Act 2010.
The chargeable consideration for the transaction is the higher of the market value of the property at the effective date of the transaction and the chargeable consideration given.
Therefore, it is important to know the market value of the property.
If the market value was £275,000 this would be the amount of the chargeable consideration as it is higher than the amount paid (£170,000).
This would also be the case if the chargeable consideration given was nil as Paragraph 1 of Schedule 1 (no chargeable consideration) is disapplied by Section 22(4) and is therefore not an exempt transaction.
Based on a chargeable consideration value of £275,000, the LBTT payable is £3350, and the ADS payable is £16,500 using the current residential rates and bands.
If, however, the market value was £150,000, the chargeable consideration would be £170,000 as it is higher than the market value. Based on a chargeable consideration value of £170,000, the LBTT payable is £500, and the ADS payable is £10,200 using the current residential rates and bands.