Welcome to May’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’.
Replacing a main residence – 18 May 2020
A scenario which comes up frequently is the case of a young adult buying their first home to live in. Often they have been living with parents or sometimes in a rented property. What they have in common is that:
- They have no share in the ownership of the property they have been living in for the last few years, though undoubtedly they have been living in that property as their only “residence”.
- They own or have a share in another property (a house or a flat, referred to in the legislation as a “dwelling”) which they have never lived in. Perhaps it was bought, or gifted or inherited (though an inherited share not exceeding 50% does not “count against” a person for the first three years of having the share). Only rarely does the “under £40,000 rule” save them (the value of a property or a share is assessed without deducting the amount of any mortgage debt).
People can get tied in knots thinking it somehow helps them that this other property has not been their “residence”; some even thinking that because it is a let property, it is not a “residential property”. It is of no help to them that they have not lived in their other property.
The 3% surcharge rules work out badly in this scenario. Having the interest in another property “counts against” the person. Nor can they come within the replacement exception because that requires a “disposal” of a “major interest” in a property which has been their only or main residence at some time within the last three years. The people in this scenario do not have a “major interest” to dispose of in the property which has been their residence.
A possible solution is to first sell or otherwise dispose of the other property owned, or at least enough of it so that the share left is worth less than £40,000. This must be done before the purchase of their new home; it does not entitle the person to claim back the 3% extra paid if they later dispose of the other property owned (because they have not lived in it).
The main reasons for the common misunderstandings are the complexity of the rules and confusion as the meanings of “residence” and “dwelling”. It does not help that the HMRC on line calculator gives little clue of what “replacing” a main residence involves. The HMRC page for applying for a refund is a lost opportunity to explain the rules and what conditions have to be met for a refund to be due.
Part exchange relief –15 May 2020
Part exchange relief, available to a house building company, is one of a number of reliefs for residential property acquisition to encourage liquidity in the property market. No SDLT is payable by a “house building company” acquiring an “old dwelling” when selling a newly built home. There are a number of conditions to meet such as:
- The old dwelling must belong to “an individual” (alone or with other individuals).
- The individual must have lived in the old dwelling as their only or main residence at some point in the two years leading up to the acquisition by the house building company.
- The individual must in exchange acquire a new dwelling from the house building company (the individual acquiring alone or with other individuals).
- The individual must intend to live in the new dwelling as their only or main residence.
The relief for the old dwelling is limited to the “permitted area” (normally half a hectare). There is no condition saying the new dwelling must be worth more than the old dwelling (though it normally is). Nor is there any requirement that the house builder sell on the old property; the builder often would do so, but could equally rent it out or develop it.
The relief can therefore work in a situation where a house building company is acquiring for development a house and garden from someone who has lived there who agrees to take, as part of the price, a new house the company has built in order to live in it and the balancing cash payment moves from the builder to the individual.
The relief is only available to a “house building company”. This would normally be a limited company. HMRC have confirmed in recent correspondence that the relief can also be available if the builder is a Limited Liability Partnership all of whose members are limited companies or is a general partnership where all of the partners are house building companies. This might be particularly useful for joint ventures of two or more house building companies.
Fish! –12 May 2020
The case of Borwick Development Solutions Ltd v Clear Water Fisheries Ltd has everything which someone who did a Latin O-level and studied Roman law at university could want. Caroline Lindon-Morris has written an explanation of the issues in this Court of Appeal case deciding that a previous owner of fishing lakes had no rights to the fish once the lakes were sold by a receiver under its power of sale under a mortgage.
The case is rich with references to animals being divided for legal purposes into “ferae naturae” and “domitae naturae“; the court held that all fish are inherently in the first category; wild animals. Whilst the fish in the lakes could not be owned in a complete sense, someone can have qualified property rights in wild animals “per industriam” or “ratione impotentiae et loci” or “ratione soli” and “ratione privilegii“.
These terms and principles are explained by reference to rights of free warren, Greyes Case from 1593, singing birds, cases involving bees and pigeons and Mr Purcell’s eels in a trunk. Young v Hichens in 1844 involved someone catching pilchards at sea; an 1897 case was about catching mackerel off Canada. Reference is made to the text by Roman Emperor Justinian in the sixth century and even earlier to Gaius from the second century. Grotius (“On the law of War and Peace” 1625) seems relatively recent in comparison.
There is even something for our friends across the pond; Pierson v Post involved the pursuit of a fox in Long Island.
There is an SDLT point to make as well which Caroline covers in her piece. On the facts, the former owner had been trying to sell the lakes for £700,000 and the fish for £200,000. In the event the receiver of the former owner sold the lakes for £625,000 giving no warranties to the buyer as to whether ownership of the fish passed.
It seems from the analysis of the property rights involved, that had the buyer bought the lakes and fish from the former owner paying a total of £900,000, then SDLT would have been due on the whole £900,000 without the ability to apportion part of the price to the fish as if they had been goods or chattels.
HMRC guidance on options – 11 May 2020
On Thursday 7 May 2020 HMRC updated the pages in their SDLT Manual on the SDLT treatment of options at SDLTM01300 with examples at SDLTM01300A and SDLTM01300B. They explained that this was being done to “confirm HMRC’s view that the option take [sic] the nature as residential / non-residential property of the underlying property”. The issue is an important one because of the markedly different rates of SDLT due on:
- Transactions involving residential property only.
- Transactions involving residential property linked to an acquisition of non-residential property (so charged at the lower mixed use SDLT rates).
The view that an option is non-residential in nature for stamp duty land tax, even if over a residential property, came to the awareness of some tax professionals because of a Readers Forum question in the Taxation magazine of 3 October 2019. The issues came up for discussion at the meeting of the Working Together Stakeholders Group of 31 January 2020. HMRC Stamp Taxes said soon after that meeting that they would prioritise updating their guidance on options to make their view clear.
I am planning to write a more detailed piece on the SDLT treatment of options involving residential property with some worked examples.
Buy and build for a council – 7 May 2020
I have put up a joint blog with Emily De La Ronde-Wilton from the public procurement team with an example of a council acquiring a new property. In the example a developer owns a site and the deal could be structured as the purchase by the council of the bare land with the council employing the developer to construct a new building afterwards.
This structure can work well for SDLT, taking advantage of the “Prudential principles” (named after a 1992 case) so that SDLT is charged on the land value, but not the build value. The blog considers the requirement that the land sale and the build contract be “capable of independent completion”. The Prudential issues have been considered before in my Case Notes, see the entry of 21 November 2019.
Emily deals with the point that the structure does not necessarily mean that the construction works have to be subject to onerous public procurement requirements. She explains how the structure might well come within the “exclusive rights exception”.
Time to pay SDLT – 6 May 2020
Stamp Duty Land Tax generally has to be paid within 14 days of the “effective date” of the transaction, which is normally completion. With the pandemic changing HMRC’s approach to taxpayers who are struggling to meet their tax obligations on time, questions have been asked as to whether HMRC’s more understanding approach to late payment of tax extends to SDLT. In particular it was unclear whether “time to pay arrangements” can be agreed in cases where taxpayers genuinely cannot pay the SDLT on time, but will be able to pay later.
It might be expected that there would be little sympathy for someone who has contracted to buy a property and should have budgeted for the purchase price, SDLT and other costs of purchase where exchange of contracts occurred shortly before completion.
HMRC might be more sympathetic in other cases, such as of a business who had committed themselves, perhaps over a year ago, to take newly developed premises and now legally have to complete the lease, but will not be allowed to trade because of the present restrictions.
It has been very difficult to find anyone at HMRC who will deal with enquiries about SDLT debt and time to pay arrangements, but I heard today that a small team of officers have been trained on SDLT debt and can be reached on 0300 200 3844.
Multiple dwellings relief clawback – 4 May 2020
Multiple dwellings relief (MDR) can offer valuable stamp duty land tax savings. There are provisions for the relief to be clawed back if events occur within three years which, had they occurred just before completion of the purchase, would have resulted in more SDLT being payable. Here is a worked example.
A developer D has agreed to buy a building comprising two flats from a seller S for £2M. D expects to be able to obtain planning consent to demolish the building and construct a bigger block of four or more flats. SDLT at the “higher rates” including the 3% surcharge would be £213,750. If MDR is claimed the SDLT would be £147,500. This is worked out on half of the price and then doubled (SDLT on £1M at higher rates is £73,750 which doubled gives £147,500). This is a saving of £66,250. It is assumed for the sake of this example that there is no question of the 15% flat rate of SDLT applying.
At some point within the next three years D expects to demolish the building and construct a bigger block. Had the work D was doing left D with one dwelling, then the clawback would apply and D would have to self-assess to SDLT and pay the extra £66,250 saved on the purchase by claiming MDR. But what is the position where D completely demolishes the building before starting the new block? Here are two answers:
- HMRC have been known to confirm that clawback will not apply where the number of dwellings is reduced as part of a continuous operation under which the number will then increase again to at least as many dwellings as before. There is no guarantee that HMRC will apply this in the future and there would be a particular danger in relying on this if there is time between the demolition and the start of the new work (even more so if it is done by different contractors).
- On the facts of this case, as the whole building is to be demolished, then the question for clawback is whether there would have been more SDLT to pay had that “event” occurred immediately before completion. If the building had been demolished before completion of the purchase, a bare site would have been bought. SDLT on the £2M would have been calculated at non-residential rates, there being no building on the site. The SDLT at non-residential rates on £2M would be £89,500. Because this is less than the £147,500 which would have been paid claiming MDR, there is no clawback.
This analysis might well make S think of demolishing the building first or at least doing enough work to it so it is not “suitable for use as a dwelling”; see the Bewley case. Selling having done that work might get S a better price on the basis that a developer would pay less SDLT and so might pay more to S.
There is more material about MDR in my paper on properties with granny flats.
HMRC working on examples of 3% surcharge scenarios – 1 May 2020
HMRC said at the 23 April 2020 meeting of the SDLT Working Together Stakeholder Group that they have two secondees working on more examples of scenarios where the 3% extra stamp duty land tax for additional dwellings might apply. This is to “bridge the gap” between the rather superficial .gov.uk guidance and the more detailed guidance in the HMRC Manual starting on page SDLTM09730. The new examples are intended to cover some slightly unusual circumstances which come up from time to time. Hopefully the examples will address these misconceptions:
- I am buying a property to live in, so the extra 3% cannot apply to me as the higher rates are charged on second homes and properties to rent out.
- I am moving from one home to another so I am replacing my main home (even though the old one belonged to parents or was occupied as a tenant).
- I have a number of let properties, but none have been my “residence”, so I can now buy a property to live in as my “residence” and not pay the surcharge. (Another form of this misunderstanding is that people think if they own let property it is not “residential property”.)
- I can recover the extra 3% when I sell another property, even though I had not lived in it during the three years before I bought my new home.
There are plenty of examples HMRC can look at to inform their work:
- My piece on the replacement exception and the three year rules.
- A related piece has examples for purchases by 26.11.2018. The three year rules did not fully apply then.
- 20 case studies on the higher rates. Each case study shows that slightly different circumstances mean the extra 3% is paid in one, but not the other, scenario.
- Katherine’s case about the replacement exception.
- Florence’s case about the replacement exception. It gets in a mention for Florence Nightingale; it is the bicentenary of her birth on 12 May 2020.
- Case studies in the context of the 2017 and 2018 budget changes.
- Some examples involving married couples to illustrate that married couples are not treated as a single unit.
- A mortgage broker example on the replacement exception.
- Some examples I gave in the early days.
- Zoopla Forum beneath the Q & A’s.
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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