SDLT - commercial roof-top solar leases

In the second article of our series, Tax in 2024 for the Future Energy Sector, the TLT Tax team considers Stamp Duty Land Tax (SDLT) in the context of commercial roof-top solar leases. We focus on when the provision of electricity in connection with the grant of such a lease will be ‘chargeable consideration’ for SDLT.

What is SDLT and how is it calculated?

SDLT is a tax on land transactions. It is potentially chargeable on the acquisition of any interest in or over land in England or Northern Ireland, which is not exempt.

SDLT is based on the chargeable consideration given for the acquisition and must be paid over to HMRC within 14 days of the effective date (usually completion) to avoid late payment interest. Even when no SDLT is due, an acquisition may still be notifiable to HMRC.

What is chargeable consideration?

Chargeable consideration can include anything given in ‘money or money’s worth’ directly or indirectly by the buyer or a connected person in consideration for the acquisition of the interest in land. Common examples include cash, works and/or the assumption, release or satisfaction of a debt.

How is SDLT relevant in the context of roof-top solar?

A commercial solar developer might typically take a lease of roof-top space on which to install its panels and pay a peppercorn rent. Simultaneously and as part of the deal, the developer might enter into a power purchase agreement with the landlord or a tenant occupier to provide it with electricity. This might be at the developer’s fixed rate, free or at a discount to the developer’s fixed rate.

In certain circumstances the landlord/occupier’s contractual right to the electricity is capable of being treated as chargeable consideration for SDLT purposes.

What is HMRC’s view on the SDLT position on these facts?

Back in 2014, HMRC issued a Stamp Taxes bulletin expressing their view that where electricity generated by roof-top solar panels is provided to a landlord/tenant occupier in connection with a lease of that space, the contractual right to use the electricity generated, either free or at a discount, would be chargeable consideration for SDLT purposes. In other words, the cost “saved” by the landlord/occupier is potentially chargeable to SDLT. HMRC confirmed that it would be taxable as a premium rather than rent. Its value for the purpose of the SDLT calculation would be the market value of the contractual right at the effective date of the grant of the lease.

At the same time, HMRC confirmed that the installation of the solar panels themselves would not usually be chargeable consideration for the grant of the lease, broadly where the panels are installed after completion, on the developer’s leased land (or other land held by it or a connected person) and where it is not a condition of the transaction that the installation works are carried out by the landlord or a connected person.

HMRC further stated that similar principles would apply where a developer tenant is granted a lease of land on which to erect wind turbines or construct renewable energy heating systems and electricity or heat generated is provided to the landlord/occupier at a discount.

This bulletin has since been archived without replacement or update.

Has HMRC’s approach to this situation changed?

Our recent experience is that HMRC’s view today remains as set out in the archived bulletin. This means that free or discounted energy which is generated and provided to a landlord/occupier by a developer tenant in connection with the grant of a lease to it, is likely to be chargeable to SDLT. Our understanding is that HMRC’s approach continues to be that it will be taxed as a premium based on the market value of the right at grant.

However, this approach has not been confirmed by HMRC in current guidance.

How does a taxpayer determine the value of the consideration in this case?

It is not clear how HMRC expects taxpayers to value the right to a supply of electricity. The archived bulletin simply states that its market value will be the amount it could be sold for on the open market at arm’s length.

This suggests that a taxpayer may need to instruct a professional valuer for assistance, in order to properly assess the quantum of SDLT due and also to be able to defend the SDLT liability it has self-assessed should HMRC challenge the position in future.

Does the position change where a landlord pays a market rate for the electricity?

Not necessarily. Our recent experience with HMRC suggests that, even if a power purchase agreement is entered into, which is independent of the lease, and the landlord pays a market rate for the electricity provided under it, HMRC may still treat the landlord as having received discounted electricity capable of being chargeable consideration for the grant of the lease.

HMRC could treat the discount as being an amount equal to the difference between the rate charged by the developer for their directly provided electricity and the rate charged by another electricity provider who wired their electricity to the landlord through the grid and thereby at a higher cost. The discount is the saving made by the landlord in buying the electricity directly from the developer.

TLT comment

HMRC’s view seems harsh on the face of it and this is a trap in the SDLT rules which is easily missed by solar roof-top developers.

However, subject to specific and limited exceptions, any consideration required to be given to secure a land interest, regardless of how or where worded, will usually be chargeable consideration for the purpose of a tenant’s SDLT calculation and it would be hard to argue that there was not an identifiable financial advantage for a landlord in receiving the solar developer’s electricity at a better price.

In many cases the practical effect may be limited. If the market value of a right to receive electricity does not exceed £150,000 there will be no SDLT to pay and, if it (and any other relevant consideration) is less than £40,000, in most cases it will not be notifiable by return either. Therefore, the SDLT position will vary depending on the facts in question and it is important to take appropriate advice.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.