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BUYERS BEWARE – Implications of SDLT for Overage Payments in Contracts for Sale of Land

‘Overage’ is a term connected with  land disposals, which allows the Seller to ‘clawback’ a further payment over and above the original selling price from the Buyer on a contingent event occurring such as obtaining a more valuable planning permission or where profits out of a completed development exceed a given figure.  The duration of the overage period is negotiable between the parties.

Stamp duty land lax (SDLT) is chargeable on consideration payable for the acquisition of a chargeable interest in land unless exemptions apply.  Where any consideration payable by the Buyer is ‘contingent’ (such as overage) then for SDLT purposes the chargeable consideration is calculated on the basis that the contingency or trigger event will occur, and that the maximum SDLT amount is payable. (s 51 Finance Act 2003)

If the consideration is not for an ascertained sum at the time SDLT is due then a 'reasonable estimate' of the unascertained sum has to be used instead used.

A Buyer can apply for deferment of SDLT if the specified trigger event will occur or may occur more than 6 months after the effective date (SDLT regulations 2003).  Deferral is not automatic and has to be applied for within the 30 day time limit but is normally granted by HMRC.

Further complications occur if the overage terms are transferable to a future purchaser and the original Buyer  is released from the overage liability, where the assignment of the contingent ‘debt’ is treated as additional consideration for the sale by the Buyer to the new purchaser.

An example:

Where a contingent event does not occur before the overage period has expired, a refund of overpaid SDLT may be claimed (s.80 Finance Act 2003)

Charge to secure payment of overage

If a charge is created to secure payment of the overage, the seller is not liable to SDLT on the creation of that charge because it is an exempt security interest (s.48 Finance Act 2003 c. 14).

This article is produced for illustrative purposes. It does not constitute legal or taxation advice and specific advice should be sought from a tax specialist on a particular transaction.

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