Implications of SDLT when entering into Overage Agreements
As a solicitor in a rural practice, I often act for clients who have agreed to purchase land ‘subject to overage’. Also known as ‘clawback’, this is where a further payment contingent upon a particular event occurring becomes payable to the Seller. A common example of this would be where agricultural land is initially sold for a fixed price (say £14,000 per acre), but the transaction is made subject to a further sum becoming due to the Seller should planning permission ever be granted within an agreed period for the development of that land. Overage would typically comprise a percentage of any uplift in value attributable to the planning permission granted.
The terms of such arrangements are bespoke to each transaction, and both the Buyer and Seller must give careful consideration to them. Ideally, this should be given attention from the outset, when negotiating the terms of sale. This ensures key terms are agreed and helps prevent any disputes arising later in the transaction.
There are many aspects of Overage that could be discussed although something I would like to discuss now and be the focus of this article is one commonly overlooked by the Buyer; that is, ‘SDLT’ (Stamp Duty Land Tax).
SDLT is a tax payable to HMRC on transactions in land, including the transfer of a freehold / lease, the grant, surrender or variation of a lease or easement (etc.)
Many people are unaware that the Buyer must pay SDLT on Overage. By way of explanation, where there is a known purchase price but an element of the consideration is contingent (i.e. on the occurrence of a future event, such as the grant of planning permission), the Buyer will pay SDLT on the total value of the consideration being paid to the Seller (assuming the contingent event occurs and overage is payable.) The Buyer must ensure they are aware of their tax liabilities from the outset, particularly for cash flow purposes.
Where the consideration is uncertain, the Buyer must make a reasonable estimate of the consideration at the date of Completion. Upon the eventual occurrence of the contingent event, a further return can be made to HMRC to pay any additional SDLT due, or claim a refund (if necessary). If the sum cannot be ascertained and is payable at least 6 months after the effective date, an application can be made to HMRC to defer the payment of SDLT (due on the uncertain consideration) altogether. HMRC seem to accept such requests although they do follow such requests up with “Deferment Application Reminders” – essentially chasing letters addressed to the Buyer and their agent asking if the contingent event has yet occurred and whether they are due any more money. I recently received one of these on behalf of my client relating to a purchase that occurred approximately 3 years ago.
Don’t squander the opportunity to get the key terms of the Overage correct from the outset. If you require advice in connection with any aspect of an Overage Agreement, do get in touch. My firm has an excellent Property Department and the team are here ready to assist you.
For further information please get in touch with Oliver Riley on 01845 522324 (Thirsk).
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