SDLT 3% Surcharge: HMRC’s mistake on ‘replacement of only or main residence’

HMRC continue to struggle with the complexity of the rules around the higher rates of Stamp Duty Land tax for purchases of additional residential properties, especially the replacement of the buyer’s only or main residence. This case study shows how they sometimes get it wrong.

The facts of Florence’s case

We were approached by a potential client who had asked for HMRC’s view on her proposed purchase.  We are calling her “Florence” in this case study to protect her anonymity and as a nod to Florence Nightingale who was born 200 years ago.

Florence has separated from her husband and is planning to buy a house as her new home in West Sussex for about £400,000.  She had left the former matrimonial home in November 2018 and sold her share in it to her husband in June 2019.

Florence is now living in a flat she had owned before meeting her husband and which had been let out whilst she lived in the marital home.  The flat happened to become vacant when she and her husband split up and it was convenient for Florence to move into it.  She plans to keep this flat.

Query to HMRC

Florence found the online HMRC guidance hard to interpret.  This is not surprising as the guidance on the .gov.uk page can be misleading and needs to be read alongside the more detailed guidance at SDLTM09800.

She called the SDLT Helpline on a number of occasions and received mixed messages.  As Florence had not been given a clear answer, she wrote to HMRC on 6 January 2020 explaining her position and asking them to confirm that the higher rates of SDLT would not apply as she would be replacing her only or main residence.

HMRC’s reply

HMRC eventually replied on 1 April 2020 apologising for the delay.  They said that “the higher rates for purchases of additional dwellings will apply” if she retained a property and said that “you cannot be treated as replacing your main residence”. For the reasons explained below, this is not correct!

One point they did get right was to say that on the basis that Florence was separated from her husband in circumstances that are likely to become permanent: “We will not treat him as a joint purchaser in relation to your purchase of your new main residence, nor will we take into consideration any interests in property owned directly by him in determining whether the higher rates will apply to your transaction”.

Summary of the conditions for the replacement exception

In order for the “replacement exception” to apply for a purchase, there are five conditions all of which have to be met.  HMRC precis them quite well at SDLTM09800.  They can be summarised as below:

• (a) On the purchase of the new home, the buyer intends to live in the new home as the buyer’s only or main residence.
• (b) In a transaction on the same date as, or in the three years before the purchase of the new home, the buyer (or the buyer’s spouse or civil partner at the time) disposed of a major interest in another dwelling (“the sold dwelling”).
• (ba) Immediately after that disposal, neither the buyer nor their spouse / civil partner retained a major interest in the sold dwelling. (Note: See below for a tweak for this relating to cases where spouses are separated.)
• (c)  At some time in the three years before completion of the purchase of the new home, the buyer had lived in the sold dwelling as the buyer’s only or main residence.
• (d) At no time on or after the disposal of the sold dwelling has the buyer (or the buyer’s spouse or civil partner) acquired a major interest in any dwelling with the intention of the buyer living in it as the buyer’s only or main residence.

As mentioned above, there is a tweak in the legislation for condition (ba) about the requirement of there being no retained share in the property.  Finance Act 2003 / Schedule 4ZA / paragraph 3(6)(6A) says that condition (ba) does not apply in relation to a spouse of the buyer if the two of them are permanently separated at the date of the purchase of the new home.

How do the rules for higher rates to stamp duty apply in this case?

Applying the rules to Florence’s proposed purchase:

• (a)  Condition met: Florence says the new home is intended to be her only home, she will move out of the flat and rent it out again.
• (b)  Condition met: so long as the purchase of the new home completes within the three year period, she meets this condition.  After an amendment to the legislation on 29 October 2018 it is now clear that a share in a property counts as a “major interest” and she sold her share to her husband in June 2019.
• (ba)  Condition met: she retains no interest in the former matrimonial home.  Although her husband now owns it, they will still be permanently separated when Florence buys her new home.  The “tweak” to the rules in this scenario is mentioned above.
• (c)  Condition met: so long as Florence completes the purchase of her new home by November 2021 (within three years of moving out of the former marital home) she will meet this condition.
• (d)  Condition met: no new home has been bought for Florence to live in since June 2019 by either her or by her husband.

As all five conditions are met, the replacement exception will apply.

Where did HMRC go wrong?

The basis of HMRC’s view that Florence would not be replacing her main residence was not clear from their letter.  Perhaps:

1. They were misled by the oversimplified guidance on a .gov.uk page which suggests that the replacement exception only applies if it is the “latest” main residence which is sold. The problems arising from that guidance are dealt with in detail in Katherine’s case study.
2. They did not appreciate that a disposal of Florence’s share to her husband qualifies as a disposal of a major interest in her former home as they are permanently separated. It does not matter that the former marital home was not sold; it is enough that Florence disposed of her share in it.

What will happen next?

It is likely that Florence will use a firm of conveyancers for her purchase who understand the SDLT rules and will be able to advise her with confidence that the 3% surcharge does not apply.  SDLT is a self-assessed tax, so Florence will be able to pay the normal amount of SDLT.

There is a consequence of Florence having sought advice from HMRC before her transaction.  When the land transaction return is sent to HMRC after completion of the purchase, as well as the usual form SDLT1, an extra form SDLT4 should be sent.  This has to disclose (at panel 3) that she had asked HMRC for advice on the application of the law to this transaction and has not followed it when completing the return.

She might want to write to HMRC after submitting the return to explain why HMRC’s advice was wrong.  This might head off HMRC opening an enquiry into the return.

Conclusion for higher rates of stamp duty land tax

It is to be regretted that the rules for the 3% surcharge are so complicated that they are widely misunderstood and even HMRC often get the analysis wrong. HMRC were in the process of reviewing the misleading guidance on the .gov.uk page, but not surprisingly have other priorities during the current coronavirus crisis.

For professional advice on Stamp Duty Land Tax 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 posted by John Shallcross on 20 April 2020.