SDLT advice for property lawyers: it’s getting more difficult!
Stamp duty land tax (SDLT) has become increasingly complex in recent years, both in its application to transactions and in the implications for those who have to explain it to property purchasers. Long gone are the days when the amount of tax depended only on the nature and location of the property; now it depends also on the purchaser’s personal factors, including their marital status, whether they have owned property before anywhere in the world, and the use to which they intend to put the property they are purchasing. The scope for errors in applying the rules is enormous.
“Speculation is rife that the budget on 11 March will increase the rate of SDLT for non-residents”
Meanwhile, it looks like the rules are only going to get more complex. Speculation is rife that in the Budget on 11 March, the Government will increase the rate of SDLT for non-residents buying English residential property. Whether or not you agree with the economics and politics of this, it will be yet another issue for property lawyers to have to deal with. Advising a client on whether they qualify as a UK tax resident is unlikely to be something with which most property lawyers are comfortable.
In addition to the innate complexity of the rules, a range of problem areas exist where even specialists are not clear on how the rules are to be interpreted. This article sets out some current areas where specialist advice is definitely to be recommended.
Multiple dwellings relief
One morning, Ms Diligent, a senior conveyancer at Best Property Lawyers, receives a call from a client, Mr Angry, for whom she acted some months previously. He has been contacted by Tax Wheezes R Us, who have told him that he has overpaid his stamp duty on his recent purchase. Apparently he could have claimed a relief worth many thousands of pounds. How can this be? Why didn’t Ms Diligent tell him and claim this relief?
Ms Diligent looks up the file to refresh her memory. In the file she sees that the property included a shed at the bottom of the garden which was used by the previous owner as a writing studio. It was fitted with a shower and a kitchenette.
Ms Diligent surmises that Tax Wheezes R Us are suggesting that this should be the basis of a claim for multiple dwellings relief, the effect of which is to allow use of the lower rates of SDLT to be applied for each dwelling acquired, giving a substantial reduction in SDLT. In recent years a number of firms have approached property purchasers offering to make retrospective relief claims for them in return for a share in the proceeds. Should Mr Angry engage Tax Wheezes R Us to make this claim?
Eligibility for relief depends on whether or not the shed is used or suitable for use as a “dwelling” for SDLT purposes. The answer to this question lies in interpretation of case-law which pre-dates SDLT rules; and although council tax applies to dwellings, it uses a different definition. One needs to take into account a range of factors, including the physical characteristics of the building, such as whether it includes washing and bathroom facilities. However, each case has to be weighed up and decided on its own facts, as often there can be facts both supporting and pointing against the relief applying. Some questions can be especially tricky: for instance whether actual use trumps suitability for use as a dwelling.
Residential or non-residential rate
Ms Diligent puts Mr Angry’s file away and then receives another call. This is from some new clients, Mr and Mrs Thrifty, looking to purchase an old house in the country with a paddock and outbuildings. However, the financing is tight; they can only afford the purchase if they can pay SDLT at the rate for commercial land. Does the fact that the paddock and outbuildings are included in the property allow this?
Ms Diligent thinks back: she had a client some time ago whose SDLT return was challenged by HMRC. HMRC had claimed that, in order to claim the rate for non-residential land, the purchaser has to show actual commercial use of the relevant parts of the property. Eventually her client had persuaded HMRC of his claim but only after taking specialist advice and many months of correspondence.
The answer depends again on all relevant factors about how the land is used at the date of purchase and whether the land fits the description of “garden and grounds” of a dwelling house. Reaching a quick decision on the appropriate rate of tax is likely to be difficult and may well depend on receiving extensive information about the property’s use from the vendor.
Additional 3% rate
Having explained to her new clients how hard it is to be sure that the non-residential rate will apply, Ms Diligent gets herself a cup of tea, hoping for no more difficult questions. But when she gets back to her desk, she finds an email from an existing client, Mr Hopeful, who is about to exchange contracts on a purchase. Mr Hopeful’s parents are funding part of the purchase price and the mortgage lender is requiring them to be on the title. Is this OK?
Ms Diligent has a recollection that this might cause problems. If the parents are purchasers of the property, this can mean that the additional 3% rate of SDLT applies to the whole of the purchase price. But if the parents have no right to the property apart from being on the title, that can be avoided. The question is what they need to show that they have no beneficial ownership of the property or any part of it. Ms Diligent is not sure what documentation would be required to achieve this.
SDLT – some key takeaways:
· If a house includes a residential annex, multiple dwellings relief may apply; but beware in case the higher rate also bites
· Owning more than one property does not always mean the higher rate applies
· An element of commercial use can potentially allow for a better SDLT rate to apply
· Purchases of residential property by companies require care, as punitive 15% rates can apply, as well as Annual Tax on Enveloped Dwellings
Conclusions
In each of the above cases, the questions on which Ms Diligent is being asked to advise go well beyond her expertise as a property lawyer. They involve complex questions of tax analysis, and reliance on HMRC’s published guidance, to deliver a tax filing position which may well not be certain in legal terms.
Advising on questions such as these involves a level of risk with which a conveyancing practice may not be comfortable. Meanwhile, to get accredited under the Law Society’s Conveyancing Quality Scheme, law firms must now have a policy on how to create an audit-trail for the stamp duty information given by the client, the calculation of the stamp duty due and the advice given to the client. A number of our law firm clients when acting for buyers refuse to complete a residential property purchase without making sure that professional SDLT advice is in place from a firm such as Rosetta Tax.
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About the author
Charles Goddard is a tax solicitor with over 20 years' experience of advising on the corporate tax aspects of a wide range of corporate and financial transactions. His clients range from multinational blue-chip institutions to private individuals.
Find out more about Charles and our corporate tax advice and consultancy services for business.
About the author
Linda Adelson is Rosetta Tax’s resident VAT expert, who has specialised in all aspects of VAT and indirect tax for over 25 years. One of just a handful of VAT solicitors in the UK, Linda is ranked by the Legal 500 as a Leading Individual for the depth of expertise in her field.
Find out more about Linda and our VAT advice and consultancy services for businesses.