Stamp Duty Land Tax 3% surcharge: Armed Forces covenant

The complicated rules for the higher rates of Stamp Duty Land Tax for purchases of additional residential properties can work out badly for members of the armed forces who have had to live away from home.  This article explores a particular problem where a replacement home is bought before an existing property can be sold, the steps being taken to try to address the problem and the latest position of HMRC on the issue.

1. THE ARMED FORCES COVENANT

The essence of the “Armed Forces Covenant” introduced formally in 2011 is that service personnel deserve fair treatment and should face no disadvantage compared to other citizens in the provision of public and commercial services.

Under the Armed Forces Act 2011 section 2, a new s343A was added to the Armed Forces Act 2006 headed “Armed Forces Covenant Report”.  The Secretary of State for Defence is required to produce a report each year including reporting on the “effect of membership of the armed forces on service people” in certain fields including housing.

The 2018 report had under “Targets for next year” “to identify disadvantages in the Armed Forces community and where possible, agree plans to mitigate this”.

2. UNFAIR TREATMENT FOR STAMP DUTY LAND TAX

There are disadvantages for the armed forces community in the operation of stamp duty land tax for some service members who own a property and are buying a property to live in.  For example they are likely to suffer the 3% surcharge if they sell their old home after buying a new home and not be able to recover the extra 3%.  Compare:

• Someone who has not been required to live away from home, who should be able to recover the extra 3% paid on their new home when they later sell their old home on the basis that they lived in the old home as their only or main residence at some point in the three years before the purchase of the new home.  (There is an article about the replacement exception HERE.)
• A service member who has been posted away from home during that three year period and consequently is not entitled to recover the extra 3%.

This harsh treatment was confirmed in HMRC’s guidance; the following is from the November 2016 HMRC Guidance Note on the Higher Rates:

Example 16

Mr N is in the armed forces and is currently stationed overseas. He owns two residential properties in the UK which are rented out. Due to the nature of his job he has never been able to live in either of the properties, although his intention has always been to live in one of them when he left the armed forces. This property is treated as occupied as a residence for Capital Gains Tax purposes. Mr N is retiring soon and is planning to sell this property and purchase a new one which will be his main residence.

The higher rates will apply to the purchase by Mr N of the new property even if he sells one of his rented properties, as neither has been his main residence. The SDLT rules do not allow armed forces personnel to treat a dwelling that they have never lived in as their main residence.

One kind of case which is particularly harsh for service families is:

• A property (Property 1) is owned which the service member bought to live in as their only or main residence immediately or in the future.
• Employment requires them to work away from home so they cannot live in Property 1.  Typically it is rented out.
• The service member is away from the area of Property 1 for over three years.
• The service member is in a position to buy another property (Property 2) to live in as their only or main residence.
• But, for whatever reason, Property 1 is not to be sold before Property 2 is acquired.
• Because of the service member still owning Property 1 when Property 2 is acquired, the extra 3% SDLT is due on the purchase of Property 2.
• Normally a person selling Property 1 within the three years after buying Property 2 would be able to recover the extra 3% paid on Property 2.
• But there is an apparent unfairness for the service member because of one of the conditions for the recovery of the 3% is that the buyer lived in Property 1 as his / her only or main residence at some point in the three years leading up to the purchase of Property 2.
• Typically this condition is not met for a service member in this position, so the 3% is not recoverable at all.
• This condition appears to treat service personnel unfairly as they are more likely than the general population to be required to work away from home for extended periods and to have to leave a property they own. (Though HMRC do not accept that this puts forces personnel at any disadvantage compared to members of the public: see 3.5 below.)

3. WHAT IS BEING DONE ABOUT IT

3.1  The Army Families Federation reported in “Army Families’ Concerns 2017” that a number of families had contacted them about the rules concerning SDLT. They reported that HMRC has determined that the Service Family Accommodation provided by the employer is designated as the main residence, which means families selling one property to buy another are subject to the higher level of stamp duty land tax. The Army Families Federation said they believed that this rule is grossly unfair and said they were in discussions with the MOD and HMRC to see if there is a way around this.

3.2  The issue was raised with HMRC at the Stamp Duty Land Tax Working Together Steering Group on 10 May 2019.  HMRC representatives recalled that HMRC had discussed the matter with the Ministry of Defence and that the MoD will be issuing guidance, but “there is no special caveat for members of the Armed Forces”.

3.3  The Chartered Institute of Taxation made a submission in May 2019 in response to the consultation on Capital Gains Tax: Private Residence Relief: changes to the ancillary reliefs.

Although this consultation was not concerned with SDLT, question 3 asked: “Do you believe there is a case for legislating to ensure that the benefits of job-related accommodation will continue to apply to personnel who organise accommodation through the Future Accommodation Model?”.  The CIoT took the opportunity to point out this issue (paragraph 6.4 of the response). They mentioned that “a member of the services in unable to claim a refund of the 3% SDLT because military service precludes qualifying occupation for the purposes of claiming a refund“.

In the HMRC’s summary of responses of 11 July 2019 HMRC note at 1.6 that some respondents  “suggested other legislative changes which fell outside the scope of the consultation. The government noted these suggestions as part of the ongoing commitment to keep the tax system under review.”

3.4 The issue was raised in the House of Commons on 26 June 2019 by Anne-Marie Trevelyan on a debate about the armed forces covenant.  Her comment is recorded in Hansard as “Another issue that has appeared is stamp duty tax. For a short time, serving personnel have the ownership of two homes and the Treasury models are not working to support them. Again, that challenge is for the family as much as for the serving personnel. Does the hon. Lady agree that the Treasury perhaps needs to focus a little more closely on its covenant commitment?” 

3.5  The Chartered Institute of Taxation and the Stamp Taxes Practitioners Group made a joint submission to HMRC on 22 July 2019 on this specific problem.  It referred to the MoD policy of helping more personnel live in rented accommodation and meet aspirations for home ownership.  It suggested that an amendment be made to the SDLT rules at the same time and in conjunction with the amendments being made to mitigate adverse capital gains tax for service personnel in this position “on the basis that an SDLT amendment would share the same underlying policy objective“.

It is suggested that “A targeted exception for service personnel and their spouse or civil partner would address the issue perhaps in the form of deeming a person(s) to have lived in a property as their main residence whilst on military service“.

The Head of Policy of Stamp Taxes responded to the CIoT / STPG submission on 8 August 2019.  The full response is to be published by CIoT / STPG, but here is an extract:

“The SDLT provisions have been considered by HMRC, HMT and MoD and all departments are content that the legislation delivers its intended policy effects. …… the policy driver for the higher rates of SDLT is to deter ownership of multiple residences at the same time, as that reduces the availability of homes for purchase.  The Government doesn’t consider that latter aim to be in conflict with MoD’s Future Accommodation Model, or with the Forces Covenant, in that the SDLT provisions do not put forces personnel at any disadvantage compared to a member of the general public.”

The HMRC response summarises benefits in the tax system for service personnel in recognition of the specific circumstances they face.

3.6  As is noted in the update below in section 5, it is possible that there will be a new impetus to get the rules changed with:

• the Office for Veterans’ Affairs being given a bigger role and
• a possible relief for members of the armed forces posted overseas from the new 3% surcharge for non-UK resident buyers.

Representations have been made ahead of the 2020 Budget for a rule change.

4. OTHER SDLT PROBLEMS FOR SERVICE PERSONNEL

The focus of the comments made to HMRC has been on the unfairness for a service member who sells their existing property after buying their new one.  But there are other problems.

There is a similar injustice where service personnel are posted away from home for more than three years and on their return, sell their home and buy another. They will not be entitled to rely on the replacement of main home exception. Had they not been away for more than three years they would have been entitled to rely on the exception.

If, for example, they happen to have a holiday home as well as their main residence, if they had been entitled to use the main home replacement exception they would have paid normal residential rates on their new home. If they have been denied that exception solely because they have been deployed away from home for more than three years, then they have been disadvantaged through no fault of their own.

5. COMMENT FROM TIM FORER ON THE OFFICE OF VETERANS’ AFFAIRS

Tim Forer of Blake Morgan had an earlier career with the Royal Navy as an officer and a barrister, where he regularly appeared in Courts Martial.

Tim said: “We await seeing whether the new Office for Veterans’ Affairs takes an interest in these tax changes as part of its remit. Johnny Mercer has been made a Parliamentary Secretary of State in both the Ministry of Defence and the Cabinet Office.  The Minister for the Cabinet Office (Oliver Dowden) and MOD and Cabinet Office Minister Johnny Mercer will jointly oversee the new Office of Veterans’ Affairs.”

6. Update of January 2020

The campaign for the General Election of 12 December 2019 made much of promises to look after members of the armed forces and veterans.  Johnny Mercer and Oliver Dowden continue in post, with the Office for Veterans’ Affairs remaining as part of the Cabinet Office.

The 2019 Armed Forces Covenant Report was published on 20 December 2019. It says:  “In 2020, the Armed Forces Covenant will be further incorporated into law over the course of this Parliament. The legislation will seek to strengthen current arrangements to remove disadvantage and improve the consistency of Covenant outcomes for the Armed Forces community.”

It seems likely that a new 3% surcharge for non-UK residents will be brought into force, perhaps with effect from the Budget on 11 March 2020.  This is explained in the item of 25 November 2019 in the Case Notes here which refers to the Consultation Paper of February 2019 for a surcharge on non-UK residents. For individuals the extra SDLT is likely to apply to those who spent fewer than 183 days in the UK in the 12 months ending with the date of purchase of a property in England.  That could catch service personnel who have been posted overseas.

At section 4 the Consultation Paper said that the government is considering an upfront relief from the new surcharge for all those non-UK residents who at the time of the transaction are Crown employees subject to UK Income Tax.  It said “… this would ensure that members of the armed forces, diplomats and civil servants on overseas postings will receive a relief from the surcharge if they are purchasing residential property in England …”.

Perhaps if such a relief is being brought in for a new 3% surcharge for non-UK residents, then a similar relief can be introduced for the existing 3% surcharge to better reflect the spirit of the Armed Forces Covenant.  Representations have been made to this effect.

For professional advice on SDLT please contact Blake Morgan’s SDLT expert, John Shallcross.

This article is intended for general information purposes only and does not constitute legal or professional advice. Advice should be sought before proceeding with any transaction.

This article was written by John Shallcross on 8 August 2019 and updated on 20 January 2020.