Welcome to March’s edition of the Stamp Duty Land Tax Case Notes from SDLT expert John Shallcross. As well as a number of guides on line, he is putting on line case notes, intended as short pieces on SDLT issues which arise from day to day. These might be of interest to a variety of people, but are mainly aimed at other property lawyers. An increasing part of John’s practice is acting on a consultancy basis to support conveyancers who advise on SDLT, but sometimes need specialist input.
You can stay up to date with all of our SDLT insights by signing up to receive our new stamp duty land tax update. Under the heading ‘Legal interests’ you should select ‘Stamp duty land tax’.
The “six pack rule” non-residential rates – 30 March 2020
One of the oddities of the definition of “residential property” for stamp duty land tax is the “six pack rule”. It is significant given the very different rates of SDLT which can apply depending on whether a property counts as “residential property” or as “non-residential property”.
The rule says that where six or more separate dwellings are the subject of a single transaction, then for that transaction those dwellings are not treated as being residential property.
That means that if, say, a freehold building comprising eight flats is acquired in one transaction, then the buyer could pay SDLT at non-residential rates (the top rate of which is 5%). This is likely to be attractive for a high value property.
I was asked recently whether the 6+ rule applies where only five of the flats are being bought with vacant possession, but the other three had previously been “sold“ on a long leasehold basis (so the buyer of the building just received a right to receive the ground rent from those three flats). The answer is that in “counting dwellings” for these purposes, there is no disregard for those flats already subject to long leases. Therefore the 6+ rule would apply and the lower non-residential rates of SDLT could be payable.
This is in contrast to the rules for multiple dwellings relief. To see whether multiple dwellings relief is available, one does not “count in” dwellings subject to a lease granted for a term of more than 21 years.
There is then the issue about whether the buyer should elect to claim multiple dwellings relief. That would take the SDLT on to residential rates. There is an example of this in HMRC’s Manual at SDLTM29971 involving a building with 10 flats, five of which were subject to long leases. It is a matter of carrying out the calculations in each case to see if claiming MDR reduces the tax.
FAQ on 3% surcharge: selling the new property – 26 March 2020
A question frequently asked about the 3% stamp duty land tax surcharge goes as follows. “Mr. and Mrs. X bought a new house, Property B, 18 months ago in order to live in it. They had to pay the 3% surcharge because they kept their previous home; Property A. Property A is presently rented out. They are now thinking of moving out of Property B and selling it. This sale would be within three years of them buying Property B. Does the sale of Property B entitle them to recover the 3% SDLT surcharge paid on Property B?
The answer is no; the sale of a property never entitles someone to recover 3% surcharge paid on that same property.
One bit of good news is that if Property A is subsequently sold within three years of Property B having been bought, the 3% surcharge paid on Property B can be recovered. That is the case even though Property B has been sold in the meanwhile.
Another bit of good news is that if Mr and Mrs X buy Property C to live in, their sale of Property B is still available to help them meet the conditions of the replacement exception in order to escape the higher rates of SDLT on their purchase of Property C.
Setting out a scenario like this in more detail:
- Mr and Mrs. X kept Property A (which they had lived in) when they bought Property B to live in. Therefore they paid the 3% surcharge on Property B.
- They decide after 18 months to move out of Property B and they buy Property C to live in. They still own Property B, accordingly they pay the 3% surcharge on Property C.
- Let us assume they subsequently sell Property B and after that they sell Property A. Both of these sales complete within three years of them buying Property B.
The SDLT analysis would be:
- The sale of Property B entitles them to recover the 3% surcharge paid on the purchase of Property C.
- The sale of Property A entitles them to recover the 3% surcharge paid on Property B.
I have published a paper with 20 case studies dealing with slightly more unusual scenarios which might be of interest.
Workaround for signing land transaction returns – 24 March 2020
I have put up a blog today mentioning a workaround where there are difficulties getting a land transaction return signed by the buyer in time. This might be of more relevance for commercial transactions where returns are frequently settled within the 14 days after completion allowed for submission of a return.
For most residential purchases the return needs to be signed ahead of completion (because of lenders’ requirements) and so will usually be signed at the same time as the transfer document or new lease.
Mixed use property: Myles-Till – 23 March 2020
The decision of the First Tier Tribunal in the case of Myles-Till v HMRC was released on 11 March 2020. A paddock of about 1.1 acres behind the rear garden, acquired from a farmer in 1983, was bought with the house. There was no evidence of actual business use since 1983 and the sales particulars said the paddock provided a view for the dwelling.
SDLT was first paid at residential rates, but an amendment was made to the return to say it was “mixed use” and to claim a refund of part of the SDLT. HMRC first processed the amendment and made a repayment, but later opened an enquiry into the amendment. HMRC issued a closure notice demanding back the £20,875 and interest.
The Tribunal agreed with HMRC that the property counted as “residential property” because the paddock constituted part of the “grounds” of the dwelling.
The decision rejected HMRC’s argument that it is enough for the land to be owned with the dwelling or to be available for the owners to use as they wish. There was emphasis on the use or function of the land, and the issue of whether the land supports the use of the building as a dwelling.
In the absence of evidence of commercial use of the paddock for many years, the fact that the paddock provided views from the building was held to be enough to make the land an appendage to the dwelling.
This is the latest in a series of cases on whether land owned with a dwelling turned the purchase into a “mixed use” property charged to SDLT at lower rates. The earlier cases are Hyman, Pensfold and Goodfellow. All cases have found in favour of HMRC. Hyman and Pensfold are understood to be subject to appeal.
POST SCRIPT of 4 May 2020: HMRC said at the Working Together Stakeholder Group on 23 April 2020 that there is a fifth case on these issues which was heard on 30 January 2020 in the First Tier Tribunal and involved a property with about 2.5 acres of woodland. The decision is awaited.
Claiming two reliefs at once – 17 March 2020
Occasionally two SDLT reliefs apply on a purchase. For example a company might buy two dwellings, one or both of which is worth over £500,000 in a single transaction or in linked transactions. If the company meets the detailed conditions for relief (for example when operating a property rental business) then the 15% flat rate of SDLT will not apply. Instead the “sliced” rates of SDLT (allowing for the 3% surcharge) are due. In these cases it is as well to claim relief from the 15% flat rate on the land transaction return using code 35, though this is not compulsory.
Multiple dwellings relief has survived the Budget, so significant savings can be made by claiming MDR, using code 33 on the land transaction return. For example, if a company buys two dwellings for £400,000 and £700,000 then, assuming the 15% flat rate does not apply, the effect of MDR is to reduce the SDLT from £86,750 to £68,000.
However the on line land transaction return only allows one relief code to be entered, so it is not possible to enter both codes 33 and 35. There is a relief code 29 for “combination of reliefs”. It is suggested that code 29 is used and a letter written to HMRC quoting the UTRN and explaining that the reliefs being claimed are multiple dwellings relief and relief from the 15% higher rate. This would be sensible given the intense focus by HMRC enquiry teams on returns made by companies for residential property purchased for over £500,000.
Also, note that for “type of property” in panel 1, code 04 should be used, “residential – additional properties”. This signals that the residential rates with the extra 3% are due.
Registering Partnership transactions at the Land Registry – 16 March 2020
One of the most complex areas of SDLT is the treatment of property transactions between partnerships and partners (or those connected to the partners). Often the rules can work out favourably for family partnerships, with there being no chargeable consideration, due to the way the “Sum of the Lower Proportions” is calculated where all of the parties are “connected persons”.
For example, parents who own farmland might introduce the land as an asset of a partnership of themselves and their adult children. The Sum of the Lower Proportions calculation means there is no chargeable consideration, even if the transfer of the land records a payment or if the transfer is subject to a debt. No land transaction return is required, but that means there is no form SDLT5 to send with the application to the Land Registry. The Land Registry normally accept the application if a statement is made that the transaction is within Finance Act 2003 Schedule 15 paragraph 10 and there is no requirement for a return to be made to HMRC.
Sometimes the Land Registry query the SDLT position, in which case it might be useful to refer them to a statement in the Land Registry internal guidance that HMRC have advised them: “where the purchaser or vendor is a partnership and the purchaser makes a statement to the effect that the transaction is within Paragraph 10, 14, 17 or 18 Schedule 15 and there is a declaration that there is no requirement to notify the transaction to HMRC, HM Land Registry can proceed without requiring further information.”
An alternative is for a voluntary return to be made to HMRC for the transaction, so generating a form SDLT5 to send to the Land Registry. As the online land transaction return will not accept zero for chargeable consideration, this can be put in as £1 and a letter written to HMRC amending the £1 to £0, explaining the underlying partnership transaction and that the return is a voluntary return. HMRC have confirmed in meetings that a voluntary return counts as a return for administrative purposes, such as the time limit of 9 months for enquiring into a return or of four years for making a discovery assessment.
POST SCRIPT of 4 May 2020: HMRC said at the Working Together Stakeholder Group on 23 April 2020 that work on guidance on the administration on SDLT is continuing and that this will cover voluntary returns.
Budget today: 2% surcharge for non-UK resident buyers – 11 March 2020
The Budget today was full of interest for many, but there is little change for stamp duty land tax. The main SDLT announcement is the introduction of a 2% surcharge for non-UK resident buyers of residential property for purchases completing on or after 1 April 2021.
This follows an earlier consultation from 11 February 2019 to 6 May 2019 on what was then to be a 1% surcharge. A budget document, the Overview of Tax Legislation and Rates (OOTLAR), says the government will shortly publish a summary of the responses to the consultation.
The most immediate impact of the proposed change will be for those non-UK residents who exchange contracts on or after 11 March 2020 for the purchase of a dwelling when the purchase will complete on or after 1 April 2021. This is likely to apply to some “off plan” purchases when completion of the purchase will occur after practical completion of the building works. Often for large developments of flats the completion dates are well over a year after exchange of contracts. The completion date is usually flexible, so there may be some non-UK resident buyers who have not exchanged contracts before 11 February 2020 who will be concerned to know that completion of their residential purchase will occur before 1 April 2021.
There is a note in the policy costings paper confirming that, as proposed in the consultation paper, refunds will be available to those who become UK resident after their purchase.
POST SCRIPT of 4 May 2020: HMRC said at the Working Together Stakeholder Group on 23 April 2020 that “L-Day”, when HMRC’s response to the consultation exercise and the draft legislation will be released, is expected to be in June 2020. The timetable is being driven by Ministers.
3% surcharge: the “under £40,000” rule – 9 March 2020
I have seen misunderstandings recently about a particular aspect of the rules on the extra 3% SDLT for additional properties. They concern the “under £40,000” rules. The cases have involved someone putting in less than £40,000 to the joint purchase of a property.
For example A wanted to help her mother B move home to live closer. B would be moving to a more expensive area so the sale proceeds from B’s home would not be enough for B’s new home which would cost £350,000. The daughter A was proposing to invest £35,000 into B’s new home and to take a 10% share in it. A was to carry on owning her own home, but thought that the joint purchase by A and B would escape the 3% surcharge because A’s share in B’s new home would be worth less than £40,000.
Reference was made to the guidance at SDLTM09780 about “Condition C” which says that for the extra 3% to apply: “The interest in the dwelling owned by, or treated as owned by the purchaser must have a value of £40,000 or more at the date of the transaction.” However that is taken out of context and does not help A. SDLTM09780 is looking to the value of the property already owned by A, not the value of the share A will have in the property A is to buy with B. (For an example of how Condition C works for an existing jointly owned property see the Adam and Eve example.)
The guidance of more relevance to A and B is SDLTM09764 about joint purchasers, saying “Where a transaction is entered into by joint purchasers the higher rates will apply if the transaction would be a higher rates transaction for any of the purchasers considered individually“. Also SDLTM09770 on Condition A which says “if the chargeable consideration is equal to or more than £40,000 then the relevant higher rates apply to the whole chargeable consideration“. This guidance could be clearer, but the “chargeable consideration” here is referring to the total £350,000 which A and B pay for the new house, not to the £35,000 which A is to contribute.
Therefore, if A helps her mother by putting in the £35,000 to obtain a share in the new house, the 3% surcharge would apply to the whole price of £350,000, increasing the SDLT payable for the new home from £7,500 to £18,000. An alternative would be for A to lend her mother the £35,000 so that B is the sole purchaser of the new home and the SDLT would be £7,500.
SDLT sweet victory for Candy – 5 March 2020
Sometimes stamp duty land tax is paid on the back of a contract which, for some reason, never completes. A recent case has looked at whether the taxpayer is entitled to a refund of the SDLT in these circumstances when the normal 12 month time limit for a refund by way of “amendment” has passed.
An example of this situation is a case where a retailer signs an agreement for lease with the landlord and takes entry to the property to start fitting out works. This constitutes “substantial performance” of the contract and SDLT is due on the rents of the expected lease. If the contract is later rescinded (perhaps because of a problem with planning consent) then there are provisions allowing the taxpayer to amend the return and reclaim the SDLT.
The 2018 case of Smallman however said that the right to amend the return is limited to the usual 12 months after the “filing date”. Accordingly, where the rescission occurs more than a year and 30 days (or 14 days now) after substantial performance, the SDLT cannot be recovered by way of amendment to the return.
The First Tier Tribunal case of Candy of 26 February 2020 rules that Smallman is wrongly decided on this point and that the mechanism of an amendment to a return can be used more than 12 months after the filing date in order to recover SDLT in the case of a rescission of a contract.
SDLT CONFERENCE on 23 March at GRAY’s INN – 1 March 2020
I am speaking at the PRT all-day conference on SDLT at Gray’s Inn on 23 March 2020, well timed soon after the Budget on 11 March. Tickets are still available. I am sharing a 45 minute slot with Paul Clark to give a residential property update. I will concentrate on whether a property counts as more than one dwelling (for example a property with a granny annexe). Paul will concentrate on “garden and grounds” and whether other land with a house makes it “mixed use”. We need to be adaptable to allow for the Budget and any cases decided between now and then. The other talks are:
- Common issues with commercial property such as the interaction with VAT, overages and sale and leasebacks by Heather Corben.
- An update on the anti-avoidance rules by Michael Thomas.
- Shared ownership leases by Jo Joyce.
- How to avoid elephant traps by Sean Randall and Michael Thomas.
- Group relief and the Prudential “buy and build” rule by David Saleh.
- The status of HMRC Guidance by Sean Randall.
- Development deals by Toby Price.
It should be an interesting day. Conferences are often a good chance to discuss other points of concern between the papers and to compare notes on grey areas.
POST SCRIPT of 4 May 2020: This conference did not go ahead because of the pandemic, but may well be rescheduled.
More SDLT case notes can be viewed here:-
These notes are intended for general information purposes only and do not constitute legal or professional advice. Advice should be sought before proceeding with any transaction.
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