What is Overage
When land is sold, the vendor will normally do his best to sell at the best possible price – indeed, if the vendor is a public sector authority or a charity, he may be obliged to sell at the best possible price. Sometimes, however, the best possible price may only be available at some time in the future, or not at all. The most common example of this is where planning permission may be granted for a more valuable use of the land, but it is by no means certain that the permission will be forthcoming and, in any event, this is unlikely to happen for some time. Similarly, if land is sold for a particular purpose, such as for the development of 50 houses, and the developer in fact manages to build 60, then the land will obviously be more valuable with 60 houses on it rather than the original 50.
Payment depending on the outcome of future events
A transaction could include an amount that the buyer will only pay if some future event happens. This is known as the ‘contingent consideration’.
For example, a developer might agree to pay an extra sum, on condition that they get planning permission for redevelopment.
In these cases you pay SDLT on the assumption that the contingency will happen. The buyer can apply to defer payment of SDLT on the contingent amount. But HMRC still charge the tax at the appropriate rate for the total chargeable consideration.
For example, a builder buys a plot for £400,000 and agrees to pay a further £200,000 if he gets planning permission for a new building. He can apply for deferment on SDLT on the conditional £200,000 but will pay SDLT on the initial payment now. The SDLT due on the initial payment will be at 4%, because the total potential payment is above the £500,000 threshold.
Payment depending on uncertain future events
Some transactions may include a later payment which depends on an unknown variable. This is known as the ‘uncertain or unascertained consideration’.
For example, future payments based on the turnover of a business.
In these cases, calculate the SDLT on the basis of a ‘just and reasonable estimate’ of the amount involved. The buyer can apply to defer payment of the uncertain or unascertainable part. Otherwise, make an appropriate adjustment when the amount of consideration is certain.
‘Slice of the action’ contracts are so called because they confer upon a landowner (who holds the land as an investment) the right to share in the proceeds of any subsequent development by the purchaser. In these cases, the contract for sale of the land to a builder or developer provides for consideration that is, in whole or in part, contingent upon the successful development of the land.
A common arrangement is for the landowner to receive a fixed sum at the time of the disposal, plus a percentage of the sale proceeds of each building subsequently constructed by the purchaser on the land. [BIM60350]
‘Slice of the action’ clauses are also known as ‘Overage’ and ‘Uplift’ they are subject to anti avoidance rules because an advantage could be gained by the land owner being tax on the ‘slice of the action’ as a capital gain instead of being tax on it as trading income. There could be a difference of 25% tax between the treatments!
Often the vendor and their legal advisers are unaware of the anti-avoidance provisions for transactions in Land.
The provisions are drawn in very wide terms. Therefore, it is not possible to provide a summary of all the situations in which the rules are applicable, although there is a list of cases in which the rules should be considered in BIM60337.
There are, however, two common situations in which the rules are regularly invoked:
Its important that starting with the Heads of Terms the legal documents clearly show the intentions of the parties.
There is a formal clearance procedure available for taxpayers who think that these rules may apply to a proposed transaction or a transaction that has already taken place (see BIM60395).
HMRC must give the applicant a decision on the transactions in land clearance within 30 days. Therefore, any clearance applications received should be identified as such and sent to the Clearance and Counteraction Team for consideration as soon as possible.
Once HMRC give a clearance, the transactions in land provisions cannot be invoked in respect of that disposal in relation to that taxpayer.
In a ‘slice of the action’ contract (see BIM60350) the following legislation is normally relevant:
- S756(3)(d) ITA 2007 for individuals, trustees and personal representatives
- S819(2)(d) CTA 2010 (for companies)
Where either of these subsections is in point, part of the overall gain may be exempted from the transactions in land rules. The effect of the exemption is to take out of the calculation of the income to be charged so much of the gain as is attributable to the period before the intention to develop the land was formed. In other words allowing the gain to be taxed as a capital gain.