SDLT Case Notes

John Shallcross specialises in stamp duty land tax.  As well as a number of guides on line, he is now putting on line case notes, intended as short pieces on quirky 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’.

SDLT Case Notes:

• March 2020
• April 2020
• May 2020
• August 2020

Case notes – September 2019 -February 2020

Overpayment relief – 27 Feb 2020

An issue which has arisen a few times over the last two weeks is the scope of “overpayment relief”: where a refund can sometimes be sought for overpaid stamp duty land tax.  It can apply for example where:

• The extra 3% SDLT was paid when the surcharge was not due in the first place.  I have had a few cases of purchases completing before 27 November 2018 when, because of transitional rules, the three year rules did not fully apply.  In those cases the 3% surcharge was paid when it was not due.  I have written about the importance of 26 November 2018 here.
• Where a return was put in on the basis that a property was “residential property” when in fact it was mixed use or non-residential property.  A building might be so derelict as not to count as a dwelling at all, as in the Bewley case.

Often mistakes can be put right by an “amendment” to a land transaction return made within twelve months of the “filing date” of the transaction (usually a little over 12 months from completion).  Overpayment relief is potentially available for four years from the filing date.  The official guidance on overpayment relief is poor and HMRC Stamp Taxes are working on draft guidance as part of the new Manual pages to be published on administrative matters for SDLT.

Overpayment relief does not apply in a number of “Cases” as set out in the legislation.  One of the cases is where the overpayment of the SDLT arose because a relief was not claimed.  One such relief is multiple dwellings relief.  The recent case of Secure Service Ltd confirms that where MDR is not claimed within twelve months of the filing date it is then too late to claim tax back through overpayment relief.

3% surcharge: selling home abroad – 17 Feb 2020

I was asked twice last week the same question about the 3% extra SDLT for additional properties.  Both cases involved someone buying a property to live in as their only home, but who owned another property (in one case a buy to let property, in the other case a holiday home).  In each case they had recently sold a home abroad and wanted to know if the sale of the property abroad could help them come within the replacement exception so as to escape the higher rates.

The answer is that the full disposal of a previous home abroad can work as well as the disposal of a previous home in the UK.  The usual requirements apply, including that the property was last lived in by the relevant person as their only or main residence at some point in the last three years.  For a property to have been a person’s residence requires that they lived in it with the “necessary degree of permanence and expectation of continuity”.

3% surcharge: not always a charge on second homes and buy to lets – 11 Feb 2020

The 3% extra SDLT has been described as a charge on “second homes and buy-to-let properties”, but that is sometimes misleading.  The legislation refers to “higher rates for additional dwellings and dwellings purchased by companies”.  This conceals many complexities.

For example the 3% surcharge can apply to a property bought for someone to live in as their only home.  This can be the case if they have other property interests and have not sold or completely disposed of another home so as to meet the conditions for the “replacement exception“.

Sometimes a property can be bought in order to be rented out, but will not be subject to the higher rates.  The buyers might have no other properties “counting against” them: whether in the UK or abroad and taking account of trust interests and properties held by minor children.  If the buyer is married or in a civil partnership the property owning position of the other party is usually relevant.  In the absence of such other properties, then the purchase of a property, even to rent out, will not be subject to the extra 3%.  In the language of the rules, the higher rates cannot apply because Condition C is not met.

There is plenty more about the 3% surcharge in the set of guides I have published and see also my paper with 20 Case Studies for the 3% surcharge.

Giving feedback to HMRC on the manual pages – 7 Feb 2020

HMRC say they welcome feedback to their guidance given in the Manual, for example the introduction page to the higher rates for additional dwellings at SDLTM09735.  This can be done by the rather unpromising link at the bottom right of the guidance page labelled “Is there anything wrong with this page?”  That brings up some odd questions: “What were you doing?” and “What went wrong?”

The tone of the questions suggests that the function of the link is to report technical IT problems with the page.  I am told however that the feedback goes to the Head of Technical in the Stamp Taxes team of HMRC and is intended to deal with the content of the guidance.  I have just given some feedback to page SDLTM09735 to say it is a shame that HMRC miss the opportunity of making it clear that the 3% surcharge can sometimes apply to the purchase of a home for the buyer to live in.  For example it is likely to be due if the buyer’s old home is kept to rent out when the new home is bought.  This is frequently misunderstood.

Cases on Multiple Dwellings Relief – 6 Feb 2020

The decision of the First Tier Tribunal in the case of Secure Service Ltd was released on 31 January 2020.  It confirms that a claim for multiple dwellings relief has to be made within a 12 month time limit and that HMRC cannot allow a claim for the relief out of that period.

I understand that another case on multiple dwellings relief has been heard by the First Tier Tribunal and the decision might well be released within the next month.  This case, from what I understand, deals with the issue of whether a property is suitable for use as two dwellings.  No doubt the accommodation available in each part and the degree of separation of the access and the services will be considered as relevant factors.  I considered the issues arising where a property might count as two dwellings in my paper on properties with a granny annex or other subsidiary dwelling.  It will be interesting to see some judicial analysis of an issue where the legislation is unclear and the guidance is HMRC’s own view rather than anything definitive.

HMRC performance with refunds and enquiries – 5 Feb 2020

Some information given at the meeting with HMRC on Friday was of help yesterday.  I was asked by the writer of an article published in Mortgage Solutions whether I knew why there was such a spike in the amount of SDLT refunded in the period October to December 2019 as shown in the figures just published by HMRC in the Quarterly SDLT Statistics.   These refunds arise from cases where home buyers have to pay an extra 3% SDLT because they still own their old home when they buy their new home.  A refund can be due when the old home is sold within three years.  This is part of the workings of the “replacement exception” to the 3% surcharge.

The “Operations Team” within Stamp Taxes at HMRC explained that they had previously been behind with refunds of the 3% surcharge.  However they had been largely hitting targets from October 2019 when they moved staff across to deal with the reclaim applications made on form SDLT16.  They reported that from October 2019 they had dealt with 89.9% of claims within the 15 working day target and caught up with the backlog from the previous quarter.  That might explain much of the spike in the refunds of the extra 3%.

Some other refunds (which HMRC refer to as “general refunds”) got held up as a result of the focus on the 3% surcharge refunds. These include cases of people claiming multiple dwellings relief and probably a limited number of cases of people seeking a refund on the basis that SDLT had been paid at residential rates when the property was so derelict that it did not count as a dwelling.  HMRC said that in January 2020 they had managed to clear this backlog too and are now dealing with 95% of general refunds within the 15 working day target.

The same Operations Team deal with staffing the SDLT Helpline.  They reported they have improved on the previous poor performance when they had 1,000 “eliminations” a day (calls which were cut off by HMRC after a long introductory message).  They reported they are now largely meeting the target of five minutes to answer the phone and a wider variety of staff are able to deal with helpline calls.

Mixed use property and multiple dwellings relief – 4 Feb 2020

Here is an update on another issue following Friday’s meeting of the Stamp Taxes Working Together Steering Group.  It concerns the position if a single transaction includes non-residential property and dwellings.  There is a question as to how the SDLT is assessed on the dwellings element if multiple dwellings relief is claimed.  I wrote a paper explaining my view that the higher rates of SDLT (with the 3% surcharge) would not apply to the dwellings in this kind of case.

We have been promised a view from HMRC on this; they say they have been awaiting their legal advice.  The update is that the issue may be of relevance in an upcoming First Tier Tribunal case.  There is a prior question of whether the property involved consists of non-residential property and a number of dwellings.  If that is found to be the case, then the question about the rates of SDLT for the dwellings will be relevant and the Tribunal would rule on it.

It is possible that the issue will be covered in the Stamp Taxes Newsletter for April 2020.  The issue hinges on the meaning in the legislation for the higher rates of the wording that a property “consists of” dwellings.  My reading is that in the context this means the same as “consists of exclusively”, but an alternative interpretation is that it should be read as “consists of or includes”.

So we might have an answer on this eventually.  In the meanwhile taxpayers need to self-assess to SDLT as best they can or they could ask HMRC for a non-statutory clearance.  A new page SDLTM09080 was added to the Manual on 15 January 2020 about how to apply for clearances.  Although it refers to “business customers” in fact the procedure applies to all tax payers.

POST SCRIPT of 13 November 2020:  HRMC have today updated their guidance at SDLTM09740 to state their view is that the extra 3% will not apply to a transaction including dwellings and non-residential property where multiple dwellings relief is claimed.  They add a requirement that the non-residential element is neither negligible nor artificially contrived.

Gifted deposits, concessionary purchases / gifted equity / family discount / genuine bargain price – 3 Feb 2020

On Friday I met HMRC’s Stamp Taxes team for a meeting of the Stamp Taxes Working Together Steering Group.  Part of the meeting was to discuss priorities for guidance.  One of my suggestions was to cover the issues where a property is bought from a relation at less than its full market value.  This is not covered by existing guidance.  I wrote about the issues in a piece in the Bank of Mum and Dad series; the first one on concessionary purchases.

At the meeting others agreed that this issue comes up fairly often and guidance would be helpful.  Matters are often confused by terms being used in different ways, especially “gifted deposit” and “gifted equity”.  The requirements of lenders as to how the transaction should be documented are often not clear, in particular whether the transfer of the property should state as the price the full market value of the property or the reduced price agreed.

Comments on the entry level guidance for the 3% surcharge – 30 Jan 2020

Tomorrow I am off to London to see people in HMRC’s Stamp Taxes team as part of the Stamp Taxes Working Together Steering Group.  One of the matters we are likely to discuss is the review by HMRC of their entry level guidance on the .gov.uk website on the higher rates of stamp duty land tax for additional properties. There are a number of errors in the guidance and plenty of room for improvement.  I have put on line a document explaining the changes I have suggested to HMRC.

One problem with the existing guidance which I often come across is the application of the replacement exception.  In order to escape the surcharge by virtue of “replacing an only or main residence” it is not always the case that it must be the last home of the person which has to be sold or otherwise disposed of (although it usually will be).  The existing .gov.uk guidance continues to lead people astray on this point, despite the conditions being set out well in SDLTM09800.  I go into it in my Case Study in some detail and understand that HMRC accept this point and are likely to correct the guidance.

Budget representations on First Time Buyers’ relief – 27 Jan 2020

Ahead of the Budget it is possible to make representations as to changes which should be made to the tax rules.  I have commented on first time buyers’ relief which appears to have been a success, not only in policy terms, but in generally being well understood and suffering from few anomalies.  I have suggested some technical changes to deal with minor defects in the legislation.

1. “Major interest” and part shares in property

The legislation for first time buyers’ relief hinges on acquiring, or having previously acquired, a “major interest” in a single dwelling.  It seems that the definition of “major interest” does not usually include a share in a property.  All sorts of odd consequences would follow if for first time buyers’ relief a “major interest” did not include a share in a property.  This is discussed at the start of section 3.3 of the paper here.

There was a similar issue with the rules for the 3% surcharge which was put right with effect from 29 October 2018.  I have suggested that the same addition should be made to the first time buyers’ relief provisions.

2. Lease granted to nominee rule

Oddly the rules for first time buyers’ relief do not disregard a special SDLT rule about the identity of the purchaser where the transaction is the grant of a lease and nominees are involved.  This is an odd omission because the point has been picked up in other recent legislation such as that for the higher rates of SDLT.

This is discussed in examples 3.2.1, 4.1 and 6.5.2 of the paper here.  There is an article about it in the Tax Journal of 30 January 2019.   I have suggested that simple provision be added to exclude the special rule so as to avoid the kind of arbitrary results which could apply now.

3. Previously having acquired a mixed use property

A person is not a first time buyer if they have previously acquired a “major interest in a dwelling”. The view of HMRC is that such a dwelling could be part of a bigger property, such as a farm with a farmhouse or a self-contained flat above a shop for the relief to be lost.

But the legislation does not say that. It refers to “a land transaction the main subject-matter of which was a major interest in a dwelling”. This contrasts markedly to the wording for the relief from 2010 – 2012: “has not previously been a purchaser in relation to a relevant acquisition of a major interest in land which consisted of or included residential property”.  This is discussed in example 3.3.5 of the paper here.

I have suggested that either the guidance should be changed to reflect the legislation, or at the Budget the Government might want to change the legislation.

POST SCRIPT of 15 Feb 2020: I understand that these representations might have found some favour within the HMRC Stamp Taxes team, so I await the Budget to see if the changes are made.  If they are made, they would probably be put into immediate effect. The budget representation portal closed on 7 February 2020.

On 13 February 2020 the Sajid Javid was replaced as Chancellor by Rishi Sunak.  The Government would not confirm whether the Budget is still to go ahead on 11 March 2020.

20 Case Studies for the 3% surcharge – 22 Jan 2020

I have published online a paper with 20 Case Studies for the 3% surcharge with a wide variety of examples which might be of assistance to those struggling with these complex rules. Each example has a twist in that a slight variation in the fact pattern is set out which will have a fundamental impact on the outcome. Many of the cases demonstrate the arbitrary nature of the rules.

There is a focus in the examples of the impact of the timing of marriage on the SDLT treatment and scenarios with divorce and separation.

I have also slightly updated my blog on the exception for the replacement of an only or main residence and the three year rules.

Military covenant blog updated, will an unfairness be addressed in the Budget? – 20 Jan 2020

I have updated my blog on the Armed Forces Covenant. The original piece of 8 August 2019 had explained how the rules for the 3% surcharge and the replacement exception can operate unfairly for members of the armed forces, who are often required to move away from the area where they own a home. Representations to get the rules changed had not been successful.

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 Case Notes item below of 25 November 2019 referred to the Consultation Paper of February 2019 for another 3% surcharge, this time on non-UK residents buying a property in England. It seems likely that the new 3% surcharge for non-UK residents will be brought into effect, perhaps with effect from the Budget on 11 March 2020. 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. That would be capable of catching service personnel who have been posted overseas.

At section 4 the Consultation Paper had 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 …”.

If such a relief is being brought in for a new 3% surcharge for non-UK residents, then a similar relief could be introduced from the existing 3% surcharge to better reflect the spirit of the Armed Forces Covenant and help those members of the armed forces buying a home to live in who would otherwise be caught out by the way the existing rules operate. I have made representations that such a relief should be brought in.

POST SCRIPT of 17 February 2020: I received a reply by way of a letter dated 11 February 2010 from the “Defence People Secretariat” within the MoD to my budget representation on the way the 3% surcharge can operate in an unfair way for the armed forces.  They say:

“The Government’s position is that the Stamp Duty Land Tax (SDLT) rules do not advantage or disadvantage Service Personnel when compared to their civilian counterparts because individuals who are not in the Armed Forces are subject to exactly the same rules. The policy driver of the higher rate of SDLT is to deter ownership of multiple residences at the same time, as that reduces the availability of homes for purchase.”

In the reshuffle of 13 February Oliver Dowden has been moved to be Culture Secretary.  The new Minister for the Cabinet Office is Michael Gove.

Out of time applications for refunds of the 3% surcharge – 16 Jan 2020

The operation of the rules for the 3% surcharge means that usually someone buying a new home before selling their old one has to pay the extra 3% stamp duty land tax.  In most cases if the old home is sold within three years there is an entitlement to a refund of the 3% surcharge as the “replacement exception” is likely to apply.  I have written a blog on the “replacement exception” and the three year rules.

What is less well known is the time limit, running from the sale of the old home, within which to make an application for a refund.  The periods within which to claim are explained in SDLTM09809  There did not used to be such a clear explanation and the deadline was often missed.  The time limits used to be very tight, sometimes as short as three months from the sale of the old home!  The time limits were extended with effect for sales of the old home completing on or after 29 October 2018; it was recognised that the time limit was too short and had been missed by a number of taxpayers.  The changes are explained in section 8 of a detailed paper I have written on the changes made to the rules on the 3% surcharge.

I have recently come across a number of cases where the sale was completed before 29 October 2018 and the earlier, very short, time limit was missed.  HMRC in each case refused a refund when the application was made in the usual way using Form SDLT16, available here.

There is however another route by which a refund can sometimes be obtained in these cases.  This appears to have become available after Members of Parliament wrote to HMRC about the unfairness of the rules which had caught out their constituents.  That route has a time limit of four years from the date the 3% surcharge first became due.  As the 3% surcharge first came into effect on 1 April 2016, there is still some time for applications for refunds to be made using this other procedure.

SDLT mixed use property, paddocks and office use of room – 13 Jan 2020

The First Tier Tribunal has recently issued its decision in the case of Goodfellow v HMRC about SDLT and mixed use property.  The judge gave short shrift to the argument that the property bought by the Goodfellows qualified for the lower “mixed use” rates of SDLT.  They had (after paying SDLT at the residential rates) sought a refund using the “overpayment relief” procedure on account of:

(a) The use of a room above the garage as an office from which to run a business.

(b)  The use by neighbours of the paddocks for their horses.

The judge held that despite the actual business use of the room, the building remained “suitable for use as a dwelling”.  Nor was the use of the paddocks enough to take them out of the “garden and grounds” of the house.

The case very much followed Hyman v HMRC where the property was also found to be liable to SDLT at the residential property rates despite the undeveloped nature of the paddocks and the presence of a bridleway over the property.  The same representatives appeared and the judge adopted much of the reasoning of Hyman.

We are expecting more litigation on this topic.  I have even seen an unsolicited letter from a firm of surveyors to the buyer of a country property suggesting that because the electricity undertaker’s cables cross the property the purchase would have counted as mixed use and the buyers should seek a refund!

SDLT on granny flats and annexes – 9 Jan 2020

I have this week updated my blog on properties with granny flats and annexes in light of the new HMRC stamp duty land tax guidance issued on 1 October 2019.  The detailed paper accessible from that blog has also been updated.  The biggest single point is perhaps that HMRC will now pay more attention than they had done before to whether it is lawful under planning law for a property to be used as more than one dwelling.

Properties which are derelict or uninhabitable – 6 Jan 2020

I have updated my blog and more detailed article on the Bewley case to take account of the comments made by HMRC in new guidance published on 1 October 2019 on the meaning of “dwelling”. The more detailed paper sets out what HMRC say at SDLTM00385, including: “A residential property that is no longer habitable as a dwelling, due to dereliction for example, would not be residential property, on the basis that it is not suitable for use as a dwelling.”

My more detailed paper at section 15 gives as an example the purchase of four properties in a single transaction for a total of £1.1M with the price apportioned as to £300K each for three dwellings and £200K for a property in poor condition. It considers how the SDLT would be assessed if the property in poor condition is no longer habitable and does not count as a dwelling.

Linked transactions, buying two new flats in a building – 2 Jan 2020

A question on a readers’ forum (p.27 of Taxation magazine, 28 November 2019) raised some interesting issues. A client was buying two new flats in a building from the developer, taking a lease of each. There were to be two contracts and two leases granted which would be linked transactions.

The published answer dealt with some points arising from the way multiple dwellings relief (MDR) works. The answer also assumed that the higher rates of SDLT (with the 3% surcharge) would apply to the two linked transactions on the basis that they would be “taxed as a single transaction” with one set of rate bands. I disagree with that analysis. Example 7 in my blog “Additional 3% stamp duty land tax surcharge on granny flats and other dwellings” sets out how the calculations are carried out for two linked transactions, one at higher rates, one at standard rates, claiming MDR.

Where chargeable transactions are linked it is quite possible that different rates of SDLT apply to the different transactions. It is not a case of assessing the tax as if the linked transactions were a single transaction. This is clear from the way that Finance Act 2003 section 55(1C) provides for SDLT to be assessed where there are linked transactions. A key to understanding section 55 is that s55(1) tells us to work out the amount of tax chargeable in respect of each “chargeable transaction”. Where there are linked transactions we have to apply the rules to each particular transaction because s55(1C) says that if the transaction is one of a number of linked transactions there are three steps set out to calculate the SDLT on the particular transaction. The steps are:

• Step 1 – Apply the slice rates to the parts of the total chargeable consideration for all of the linked transactions using the appropriate table for that particular transaction.
• Step 2 – Add up the SDLT on each slice (to give the amount which would have been due at the relevant rates on the total chargeable consideration for all of the linked transactions).
• Step 3 – The tax for the particular transaction is a fraction of the amount in Step 2. The fraction is C / R where C is the chargeable consideration for the particular transaction and R is the chargeable consideration for all of the linked transactions.

We see these rules in operation when there is a change to the rates or structure of SDLT and the dates of the linked transactions straddle the changes. There was an example in the guidance notes for the changes made in 2014 when residential property moved from slab rate to slice rates with effect from 4 December 2014. The example (in chapter 5) is of linked purchases of houses with:

• Transaction 1 on 1 December 2014 for £400,000 (under the old slab rules) and
• Transaction 2 on 1 March 2015 for £300,000 (under the slice rates).

The guidance note explains that:

• The tax on Transaction 1 is worked out using the old rules applicable on 1 December 2014. On a combined chargeable consideration of £700,000 the rate was 4% (that rate at the time applied where the chargeable consideration was between £500,000 and £1M), so SDLT is due at 4% on £400,000. (Oddly the guidance note does not explain that before the later linked transaction, SDLT would have been due on Transaction 1 at 3%. Therefore when the later linked transaction completes liability for an extra 1% to bring the SDLT up to 4% for Transaction 1 is triggered by FA03/s81A).
• The tax on Transaction 2 is worked out using the three steps. Step 1 is to work out the elements at slice rates on the total chargeable consideration over the linked transactions of £700,000. Step 2 is to add up these elements which gives £25,000. Step 3 is to apply the fraction. The fraction is £300,000 / £700,000. This fraction of £25,000 gives tax due of £10,714 on Transaction 2.

The guidance note does not give the calculation if MDR was claimed. If MDR is applied to each transaction, SDLT would be worked out as follows:

• The tax on Transaction 1 is worked out using the old rules applicable on 1 December 2014. On a combined chargeable consideration of £700,000 the average per dwelling is £350,000. Under the old rules the rate of 3% applied to transactions within the bracket £250,000 to £500,000. Therefore SDLT remains due at 3% on £400,000. SDLT at 3% would have been due at the time of Transaction 1, so no more SDLT becomes due as a result of the later linked transaction.
• The tax on Transaction 2 is worked out using the steps and combining them with the way MDR is calculated. So Steps 1 and 2 are to work out the elements at slice rates on the total chargeable consideration over the linked transactions of £700,000, but on the average price of £350,000 (then doubling the amount of tax). SDLT on the average of £350,000 would be £7,500 which we double to give £15,000 as the SDLT on the whole £700,000 (1 March 2015 was before the higher rates came in on 1 April 2016). Step 3 is to apply the fraction. The fraction is £300,000 / £700,000. This fraction of £15,000 gives tax due of £6,429 on Transaction 2.

A guidance note of 16 March 2016 (for when the rates of SDLT for non-residential property moved from slab rates to slice rates for transactions from 17 March 2016) has similar examples for linked transactions straddling the change in the rates of SDLT.

The s55(1C) method for working out SDLT on a transaction by transaction basis also applies where different transactions are subject to different rates or tables for different reasons; for example because one is liable at the higher rates (with the 3% surcharge) and another at standard rates (perhaps because it counts as a “replacement” for a main residence). This was confirmed by Peter Downing, the head of the HMRC Stamp Taxes Policy Team, at a meeting on 22 March 2016 when the higher rates were coming in. He had been sent questions in advance about linked transactions (one at standard rates, one at higher rates). He confirmed in the same meeting that MDR could be combined with this treatment, working on a transaction by transaction basis.

See also my paper on how to apply MDR for a single mixed use transaction with several dwellings: the Appendix contains worked examples of how to calculate SDLT over five linked transactions, some with dwellings only, some with non-residential property.

Higher rates for couples, comparison with Scotland – 30 Dec 2019

As we approach Hogmanay and our Scottish friends will be first footing, we could spare a thought for an unfairness in the operation of the Scottish rules for the “Additional Dwellings Supplement” (ADS). This has been highlighted in two decisions of the Tax Chamber of the First-tier Tribunal for Scotland in the cases of Mr John William Wallace and another v RS and Mr Neil Doherty v RS.  Both judgments were by the President of the Tribunal and were released on 27 November 2019, confirming the reasoning in an earlier case of Dr Colin Goudie and Dr Amelia Sheldon v Revenue Scotland.

Scotland has had its own form of stamp duty on property since 1 April 2016 (Land and Buildings Transaction Tax or LBTT).  By an amendment taking effect from its introduction (to follow the lead set by SDLT) it had an extra 3% for buyers of additional dwellings.  This was increased to 4% with effect from 25 January 2019.  LBTT is a different tax to SDLT, though there are similarities.  The ADS is based on, but is different from the 3% surcharge to SDLT.  We are experiencing ever looser union.

In each case:

• Two unmarried individuals, A and B, bought a home to live in together.
• A still owned another property which A had lived in as his only residence in the 18 months before the joint purchase (in Scotland the relevant period is 18 months, not 36 months as for SDLT).
• B did not own a property at the time of the joint purchase.
• B had not ever lived in the other property owned by A.
• After the joint purchase, but within the 18 month period (this too would have been 36 months had SDLT applied) A disposed of all his interest in the previous home.  In the Neil Doherty case this was by a transfer of all of his interest to his previous wife.  In the Wallace case it was by Mr. Wallace selling his previous home.

The ADS rules work differently for joint buyers than the equivalent SDLT rules.  Also they treat spouses, civil partners and cohabitants differently. For the ADS there is a rule saying that a buyer with a spouse, civil partner or cohabitant is treated as owning a dwelling owned by that other person.  So in the two Tribunal cases B (who was a cohabitant with A) was treated as owning the other property which A owned.  The way that the ADS provisions operate meant that when A disposed of the previous property the 3% ADS was not recoverable!  That was because B was treated as owning A’s property for these purposes, but had never lived in it.  B could not therefore rely on the “replacement exception”.  (In a similar way to SDLT, the ADS replacement rules require that one must dispose of a home one had lived in as a main residence.) B had no disposal to rely on, not being able to rely on the disposal by A, because B had never lived in the property A later disposed of.

The Tribunal accepted that the result would have been different if A alone had bought the new property.  The 3% surcharge would have been recoverable when A sold the previous home.

Whilst the SDLT rules are full of anomalies and unfair results, the SDLT treatment in these cases would have been fairer.  The way the SDLT rules work in this situation in contrast is as follows:

• For joint purchasers one looks at each buyer separately as if that one person was buying.
• If for one or more purchasers the higher rates would have applied, then the higher rates apply to the whole transaction.
• There is no rule deeming a spouse, civil partner or cohabitant to own the property belonging to the other.
• Instead there is a rule (limited to spouses and civil partners who are “living together with” the buyer) saying that the purchase has to be judged as if that spouse or civil partner was also a buyer.
• There is no general rule treating spouses or civil partners as a single unit.
• There are no special rules for cohabitants (in contrast to LBTT).
• In a similar way to LBTT, there can be a right to recover sometimes if a previous home is later sold or otherwise disposed of (for SDLT there is 36 months, for LBTT only 18 months).

So if we had to apply the SDLT rules to the facts in the LBTT cases of Sheldon, Doherty and Wallace, it would have gone like this at the time of the joint purchase:

1. We look at A and B separately as if each was buying alone.
2. Looking at A as if buying alone, the 3% surcharge would have applied as A owns the old home and does not come within the “replacement exception”, not having disposed of a property within the last three years.
3. Looking at B as if buying alone, the 3% surcharge would not have applied as B has no other property interests (unlike for LBTT there is no rule deeming B to have owned A’s property).
4. There are no spouses or civil partners who are “deemed” buyers; the status as cohabitants is irrelevant for SDLT.
5. Because a purchase by one of the buyers (A) buying alone would have suffered the 3% surcharge, the purchase as a whole suffers the 3% surcharge.

This is the same outcome as for the LBTT cases, though for different reasons.

Applying the SDLT rules once A had sold the previous home, this is the approach:

1. We look at A and B separately as if each had bought alone.
2. Looking at A as if he had bought alone, the 3% surcharge no longer applies as A now comes within the “replacement exception” having disposed of a property within the last three years which he had lived in within the three years leading up to the joint purchase.
3. Looking at B as if buying alone, the 3% surcharge would not have applied as B has no other property interests (unlike for LBTT, there is no rule deeming B to have owned A’s property).
4. There are no spouses or civil partners who are “deemed” buyers; the status of A and B as cohabitants is irrelevant for SDLT.
5. Because following the sale by A, the purchase by neither of the buyers buying alone would have suffered the 3% surcharge, the joint purchase as a whole is no longer liable the 3% surcharge.
6. A and B are now entitled to recover the 3% extra paid (complying with the time limits, now extended to 12 months from A’s disposal).

This is a different and a fairer result than for LBTT.  Had the facts of the cases occurred in England, the 3% would have been recoverable when A sold his former home.

The Tribunal in both cases said it understood why the buyers considered the LBTT legislation to be unfair, but said the Tribunal had no jurisdiction to consider whether the law is fair, but could only apply the law.

In the Doherty case the Tribunal was not impressed by the taxpayers’ arguments about what they said was confusing guidance.  The Tribunal said that it “applies the law, not Revenue Scotland’s interpretation of the law as set out in their Guidance”.  The First Tier Tribunals in England seem to take a similar approach, being happy to refer to HMRC guidance in their deliberations, but ultimately applying their own interpretation of the statute.  That is just as well, when some of the HMRC guidance is out of date or misleading, as is the guidance on the higher rates concerning the replacement exception: see this case study where HMRC compliance officers in the first instance misapplied the rules as to the requirement for the disposal of a previous residence and the transitional rules for purchases by 26 October 2018 when the three year rules did not fully apply.

Is an ice house or a ski chalet a dwelling? – 23 Dec 2019

Mr. S Claus is buying a home in England for two long serving employees to live in during their retirement.  Mr. Claus wants to know if the higher rates of SDLT (with the 3% surcharge) would apply as Mr. Claus will not be living in the new property.  For part of the year Mr. Claus lives in an ice house near the North Pole and the rest of the year he lives incognito in rented accommodation in Lapland.

It is clear that Mr. Claus will not qualify for first time buyers’ relief as he does not intend to live in the property as his only or main residence.  The 3% surcharge would only apply if Mr. Claus has another dwelling “counting against him”: that is to say the purchase satisfies Condition C for the surcharge to apply. (For a summary of Conditions A to D see SDLTM09765 and for much more technical detail on the 3% surcharge and the changes made in successive Budgets see my paper here.)  Condition C is explained at SDLTM09780.  It is also relevant to know whether Mrs. Claus has any property interests because, for the purposes of assessing whether the higher rates apply to Mr Claus’ purchase, it has to be judged also as if she was buying the property.

Details are needed of Mr. and Mrs. Claus’ property owning position.  He says he owns the equivalent of a freehold of his property near the North Pole.  There is plenty of grazing for his deer in the summer.  There is no permanent structure there, but an icehouse is made each year for them to live in and workshops are formed nearby.  The fact that this property could be considered “mixed use” does not itself save him from meeting Condition C; SDLTM09785 makes it clear that an individual holding a mixed residential and non-residential property will meet Condition C if the property already owned contains a dwelling.  Other than that, they have no property interests.

The issue is whether the icehouse (which is built each year, used for a few months and then melts) counts as a “dwelling”.  What is a “dwelling” for these purposes is defined by Finance Act 2003 / Schedule 4ZA / para 18.  It is clear that there has to be a “building”, because part of the definition is: “A building or part of a building counts as a dwelling if … it is used or suitable for use as a single dwelling”.  It seems most unlikely that the icehouse would count as a “building” on the basis of the lack of the necessary degree of permanence of the structure referred to in the guidance at SDLTM00385.

On the basis that a purchase by neither Mr. Claus nor by Mrs. Claus would meet Condition C (there being no other properties “counting against” them) then the higher rates would not apply to the purchase by Mr. Claus.  It does not matter that he does not intend to live there.  Indeed if this is his only property it would not matter if he intended to rent it out, to live in it occasionally, or (subject to obtaining the necessary consents) to use it for other purposes such as workshops or for storage of presents.

Issues can arise for other properties already owned which are clearly buildings, such as ski chalets or holiday homes subject to restrictive planning consents.  HMRC guidance is presently rather contradictory on the matter of properties with tight planning restrictions, such as a “clause” limiting occupation by any one individual to no more than 30 nights in any calendar year.

The older guidance at SDLTM09750 suggests that a holiday home, even if cannot be used all year round, is a dwelling for the purposes of the higher rates of SDLT.  The position in the more recent guidance in SDLTM00385, published on 1 October 2019, is more nuanced.  This now suggests that planning conditions affecting use are a factor in assessing suitability for use, especially where there are restrictions which impact on use as a dwelling for only part of the year.  An example given is of a holiday chalet used for short stays.  It is stated that it is not being “used as a dwelling” by short term visitors, but could be “suitable for use” as a dwelling.  The guidance says: “if restrictions of planning exist whereby chalet use is not permitted out of season or where only short stays are permitted then this would be a factor indicating that the chalet will also not be ‘suitable for use’ as a dwelling”.

Other issues, apart from planning restrictions, can arise with ski chalets such as:

• Often they are held on leases, or are subject to leases, which allow the owner to make use of the property only for a few weeks of the year, but a managing company lets it out for the rest of the year for short breaks.  On this legal structure no-one would be able to live in the chalet as their home.
• Sometimes they form part of a larger complex which is shut down for part of the year, with utilities such as power, water and heating being cut off.

If Mr. Claus buys the property after the proposed 3% surcharge for non-UK resident buyers comes in, his purchase could attract the new 3% surcharge on top of existing rates.  We might find out in the next Budget (now expected to be in February 2020) whether that will be brought in.  This proposal was revived in a press release of 21 November 2019 ahead of the general election as a policy to be introduced if a Conservative majority government be formed.  A consultation ran to 6 May 2019 on a proposed structure for such a surcharge for non-UK residents (at the time proposing a 1% surcharge).  Nothing is said in the proposals about individuals who claim to be omnipresent.

POST SCRIPT of 7 January 2020: A budget has been announced for 11 March 2020.

Joint borrower sole proprietor mortgage – 20 Dec 2019

Simon Burge and I wrote a blog a year ago on issues with joint borrower sole proprietor mortgages and the use of living together agreements.  The issues remain just as relevant and the availability of this type of mortgage appears to be increasing.

That blog focussed on an unmarried couple where only Donald was putting in capital for a purchase.  Hilary (who owned another property) was to have no share in the new property, but was to be jointly liable on the mortgage with Donald; they would both live in the new house.  A living together agreement (also called a cohabitation agreement) to some extent could protect Hilary, especially her position in a relationship breakdown (where potentially she could remain fully liable on the joint mortgage but still have no share in the property).  In the scenario envisaged by the blog, the structure worked out well for SDLT, with Donald as the sole buyer of a £400,000 property being able to rely on first time buyers’ relief and pay SDLT of £5,000, rather than the £22,000 which would have been due had Hilary taken any underlying share in the property.

My article in Tax Adviser of 1 January 2019 dealt with similar issues and explained that it is not enough for a property to be bought “in the name of” one person if the other person has an underlying share in the property, perhaps by virtue of having put in capital.

Another potential use of a joint borrower sole proprietor mortgage as part of an efficient SDLT structure, is where parents (or other family members) help a property buyer by becoming jointly liable on the mortgage without taking a share in the property.  This is considered as the fourth scenario in the Bank of Mum and Dad blog of 9 September 2019 (the last of a series of blogs on the Bank of Mum and Dad). In that fourth scenario Den and Karen helped their son Richard buy a property for £300,000 by becoming jointly liable on the mortgage, though Richard was to be the sole owner of the property and so qualify for first time buyers’ relief.

Where parents are involved, it is quite possible that they gift their adult child some capital as well as becoming liable on the JBSP mortgage.  Sometimes (subject to lenders’ consent) the parents could lend their child money, with the commercial lender’s debt taking priority to that of the parents.  Either of these structures would mean the child is the sole beneficial owner of the property and so could potentially benefit from a more favourable SDLT treatment.

With parents it is understandable that they might gift substantial sums of money to their child, so that the child can be the sole owner of the property.  However where the other party, who is not to be the owner, is an unmarried partner, it is far less likely that one would wish to make an outright gift of capital to the other so the other could be the sole owner of the property.  The structure rarely works out well for stamp duty land tax if the person who is not to be a proprietor is putting in capital.  Occasionally the commercial lender would allow this money to be lent to the buyer and rank behind the commercial lender, but this is unusual with many lenders not willing to proceed on this basis, having concerns as to affordability.

It is not enough to secure an SDLT saving that a property is bought “in the name” of a person without another property; it needs to wholly belong to them beneficially as well.  It is not a problem that there are debts secured against the property, but it does not work if there is a trust in favour of another party (whether under an express declaration of trust or an implied trust, such as a resulting trust where capital is contributed without being gifted or lent).

Six plus rule – 16 Dec 2019

Occasionally six or more properties, typically new build flats, are bought in one deal.  The legislation at Finance Act 2003 s116(7) provides that “where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease over, them, then … those dwellings are treated as not being residential property”.  That means that the non-residential rates of SDLT apply.  This can give a considerable saving as the non-residential rates never exceed 5%.  In contrast, the rates for residential property are higher, with a top slice rate of up to 15% for the most valuable properties.

There are a number of complications to look out for:

1. There was considerable uncertainty as to the requirement for a “single transaction”.  A “land transaction” is usually constituted by a single transfer of land or a single lease.  The purchase of six newly built flats would normally be completed by the grant of six new leases, so there would be six different land transactions.  However the word “transaction” can sometimes mean something different from “land transaction”.  The roots of the special rule in s116(7) lie in the old Disadvantaged Areas Relief for stamp duty and so “single transaction” appears to have a distinct meaning in this context. HMRC confirmed in a meeting with the Chartered Institute of Taxation and the Stamp Taxes Practitioners Group on 11 June 2018 that the meaning of “transaction” in s116(7) is wider than a “land transaction”.  The point is confirmed at section 9 of the agreed notes of the meeting.  HMRC accept that the special rule can apply when there is a single contract, as opposed to a single land transaction. They say the fact that completion takes place at different times for different properties under a single contract does not affect the analysis. Accordingly, they accept that the acquisition of six or more flats under one contract with completion at different times, as the flats come on stream, is a “single transaction” for the purposes of section 116(7).

2. If the non-residential rates of SDLT apply then there can be no question of the 3% surcharge applying on top of the non-residential rates; the maximum rate is 5%.

3. A person buying six or more dwellings in one transaction should carry out calculations to see if it is preferable to claim multiple dwellings relief.  This is referred to at SDLTM29905 and SDLTM29971 and there are example calculations at SDLTM09840.  There is guidance at SDLTM09710 on cases where some of the properties are higher threshold interests subject to the 15% flat rate of SDLT (see 4 below).

4. However, if the purchase is by a “non-natural person” such a company and a just and reasonable apportionment of the price to any one or more of the dwellings would be over £500,000, then consideration needs to be given to whether the punitive 15% flat rate of SDLT applies to that dwelling (a “higher threshold interest”).  There are some reliefs to the 15% rate, but they are complex.  If none of the reliefs apply then the acquisition is divided up and treated as separate unlinked transactions, with the higher threshold interests subject to SDLT at 15%.  There is guidance on how to apply the 6+ rule to the remaining dwellings at SDLTM09535 (example 3 confirms that the non-residential treatment can still apply to less than six dwellings if there are six or more in the “primary transaction”).

5. I recently had to give some thought to a land transaction return for six flats bought pursuant to one contract.  It was made simpler by the fact that completion of all six flats was on the same day.  A single return could be made.

• The code for the type of property at panel 1 had to be 03 for non-residential.
• Panel 9 is about claiming relief.  The special rule in s116(7) is not a relief to be claimed.  If over £500,000 is paid for any of the properties then it is optional (though not compulsory) to put in code 35 to claim “relief from the 15% rate”.
• Panel 13 about linked transactions gave me pause for thought.  On one level it seems correct to say there were no linked transactions, as the nature of the s116(7) analysis is that there is a “single transaction”.  However the question might well implicitly be asking about “land transactions”.  Perhaps the question should be read as asking “whether there are any linked land transactions not covered by the return”; this would better fulfil the likely intention behind the question.  An alternative view is that a single return covering all of a set of linked transactions should still say “yes” to the question about linked transactions.  The old guidance in SDLT6 took that approach, but the present guidance does not cover the point. The person I spoke to on the HMRC SDLT Helpline 0300 200 3510 just repeatedly said “it is a self-assessed tax” and it is up to the taxpayer how to answer this question.
• Q26 allows extra property addresses to be added and generates an extra form SDLT4 for each in which the address and lease details can be inserted.
• Though Q27 suggests a SDLT5 certificate will be generated for each property, HMRC will not automatically issue these, but if specifically requested will post further certificates.
• The person on the Helpline suggested that a form SDLT3 should be provided for each additional property to give the address of each flat.  When told that the HMRC software only generates a SDLT4 for each property, she said we could rely on their software to guide us in completing the forms.

6. It is less obvious how to complete the returns if the different properties under the contract complete on different days.  HMRC were asked about that in the same 11 June 2018 meeting and said that an assumption could be made, even when completing the first return, that the other properties to be sold under the contract would also complete, so even the first return could state that the property is “non-residential” and we would pay SDLT at that rate.

3% surcharge replacement exception case study – 12 Dec 2019

There has been some good news for Katherine featured in a case study on an SDLT issue concerning the extra 3% for additional properties.  A problem had arisen for Katherine out of misleading information in the brief HMRC guidance “Guidance: Higher rates of Stamp Duty Land Tax”.  That guidance suggests that for the “replacement exception” to apply, the property disposed of must have been the person’s last main home that they owned.  This is not correct; it is not always necessary that it was their last home which was disposed of.  HMRC made a check of her return and sought to impose the extra 3% even though she met the statutory conditions for the “replacement exception”.  HMRC admitted their mistake a few months ago and accepted that her land transaction return was correct.

I have updated the case study to explain that HMRC have now paid Katherine her legal costs for demonstrating to them that they were wrong and HMRC made a small compensation payment as a gesture of goodwill.  HMRC have yet to correct their guidance though!  There is a meeting with them at the end of January 2020 to discuss priorities on updating their guidance on SDLT.

Sale and rent back – 29 Nov 2019

Sometimes I am asked an SDLT question, but raise an entirely different issue.  For example I was asked twice last week about whether someone who is buying a house can qualify for the replacement exception to the 3% surcharge for additional properties when they will rent the property back to the seller for a few months before moving in.  The SDLT issue can arise where someone has sold their home, owns another property and buys the new property to live in once the previous owner moves out some time after completion.  There are problems with the replacement exception if the buyer intends to let out the property before living in it as referred to in SDLTM09812.  However, there are more fundamental problems under financial services legislation if the property is to be rented back to the seller.

These problems arise from an amendment to the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI 2001/1177) made by the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014 (SI 2014/3340) which came into force on 31 December 2014.  The effect is to regulate someone who only enters into only one transaction as this is treated as being “by way of business”. The amendment is due to last until 1 January 2022.

It is a criminal offence for a person to buy a property in a regulated sale and rent back agreement unless the person is an authorised or an exempt person under the Financial Services legislation or an exclusion applies: there is an exclusion where the buyer and the seller/tenant are closely related.  Exempt persons include local authorities and registered social landlords. But in the ordinary case of a buyer proposing to allow the seller to remain in occupation there is no exemption and the buyer, if an individual, will not have the authorisation or exemption under the Financial Services legislation.

The rules were brought in to address concerns about vulnerable people being persuaded to sell their homes at less than full value with promises of continued occupation at a low rent.  See for example Cook v The Mortgage Business Plc in 2012.  However the rules operate much more widely and often catch what seem to be sensible arrangements between sellers and buyers on sales for full value.

Sometimes the transaction can be saved by dealing with things in a different way, often by delaying completion until the seller is ready to move out or by finding other accommodation for the seller from the completion of the sale.  It is no escape to document the occupation by way of licence, nor to make it rent free, nor by granting the tenancy to a close relative of the seller.

There is guidance on this from the Financial Conduct Authority in their Perimeter Guidance Manual at section 14.5 Q38E.  For more details of financial services law contact our expert Richard Humphreys.

Sale and leaseback relief – 27 Nov 2019

Finance Act 2003 section 57A contains a relief for the leaseback leg of a “sale and leaseback” transaction.  The arrangements which qualify are where:

• “A transfers or grants to B a major interest in land” (that could be a freehold or a lease assigned or granted to B) and is called “the sale” and
• “out of that interest B grants a lease to A (the “leaseback”)”

The wording is wide enough to apply to a “lease and leaseback transaction”, where A grants a lease to B and out of that lease B grants a leaseback to A.

These transactions are frequently used to release capital.  For example A is a retailer owning a shop and B is an investor.  A can sell the shop to B, with B granting a leaseback at a rent.  A receives the sale price and retains the use of the property, B receives the freehold and is entitled to a rent stream.

Section 57A does not relieve the sale leg; the transaction counts as an “exchange” of land interests, so B has to pay SDLT on the market value of the interest acquired (often a freehold).

The provision relieves any actual or deemed premium for the leaseback and the net present value of rents under the leaseback.  The relief is set about with conditions:

• The leaseback must be granted by B “out of” the freehold or headlease transferred or granted.  So it would not work if the freehold is transferred of Unit 1 but the leaseback is granted in return of Unit 2.
• The buyer B can give nothing in return other than cash, debt and the lease.  For example B promising to do works as part of the transaction on the face of it means that A does not qualify for the relief.
• It does not work if the sale leg is a subsale transaction (for example if A has contracted to buy the freehold from X and at the same time as A receives the freehold from X, A transfers the freehold on to B).
• Nor does it work if A and B are group companies.

I have recently had to consider in some detail the condition that the only consideration the buyer B can give for the sale is cash, debt and the lease.

What if B grants an option to A to buy back the property?

It is fairly common in financing transactions for B to give A an option to buy the property back.  The better view is that if the option is included within the leaseback then the grant of the option does not cause the loss of leaseback relief for A.

What about tenant covenants by B in a lease in a lease and leaseback transaction?

Income strip transactions can involve A granting a lease to B and B granting a leaseback to B.  The funds paid by B to A might be used by A to carry out development works.  The consideration provided by B is:

• (a)  The cash B pays A
• (b)  The lease B grants A.

Both of these are permitted consideration.  But what of the tenant’s covenants given by B in the A to B lease which go beyond obligations to pay cash?  It is understood that usual tenant covenants from B in the A to B lease will not disqualify A from leaseback relief on the B to A leaseback.

Proposed 3% surcharge for non-UK residents – 25 Nov 2019

It seems likely that a surcharge to SDLT will be brought in for non-UK resident purchasers of residential property.  The idea was first floated for the Conservative Party Conference in October 2018. The technical details of the proposals are far advanced; there has already been a consultation on the proposals running from 11 February 2019 to 6 May 2019 when a 1% surcharge for non-UK residents had been proposed.  The consultation document proposes a relatively simple rule for individuals buying in England. The consultation paper also covers more complex scenarios for purchases by companies, partnerships and trusts.

The Conservative manifesto published on 24 November 2019 under the heading “Deliver the housing people need” says: “We will help pay for this by bringing in a stamp duty surcharge on non-UK resident buyers.”  That is the only mention of SDLT in the manifesto.  More detail of the proposed 3% surcharge for non-UK resident buyers can be found in the Conservative’s press release of 22 November 2019.

There is no mention of SDLT in the Labour manifesto, though they say: “We will introduce a levy on overseas companies buying housing”.  The Liberal Democrat manifesto proposes: “A stamp duty surcharge on overseas residents” buying second homes.

Example

The proposed rules for individuals can be illustrated by Kevin and Mary who are hoping to buy a home in England in the next two years.  They are British citizens and had been UK resident until 18 months ago when they sold their home in Oxford and moved to a property they own in France.  The French property had been a holiday home, but for the last 18 months has been their only home.  They intend to keep it as a holiday home when they buy a new home in Southampton to live in.  In order to escape the higher rates of SDLT (the existing 3% surcharge) they would need to complete their purchase within three years of having moved out of and sold their home in Oxford.

So where they do stand as expats if the new rules for a 3% surcharge on non-residents are in force when they complete the purchase in Southampton?  The rules are not based on nationality, nor on other existing tests of tax residence.  The rules proposed in the Consultation Paper are simpler: the question on the date of completion of the purchase will be whether Kevin and Mary spent fewer than 183 days in the UK in the 12 months ending with the date of purchase of the Southampton property.  If they spent fewer than 183 midnights in the UK then the 3% surcharge for non-UK residents will apply on top of whatever SDLT would (under existing rules) be due.

That is not the end of it though if the new surcharge is due.  If Kevin and Mary spend 183 days or more in the UK in the 12 months following the date of the purchase they will be eligible for a refund of the 3% non-UK residents’ surcharge.  It might help to put some figures on it:

1. Let’s assume that Kevin and Mary buy the Southampton property for £400,000 after the new rules come into force, but within 3 years of having moved out of and sold the Oxford property.  They move from France into the property in Southampton, keeping the French property.

The SDLT would be £22,000 made up of £10,000 ordinary SDLT and £12,000 as the 3% surcharge for non-UK residents.  The 3% surcharge for additional properties does not apply as Kevin and Mary are replacing their main residence within three years.

• Kevin and Mary could recover the £12,000 once they have lived in the UK for the required 183 days after buying the Southampton property.
• That leaves the net SDLT liability as £10,000.

2. Now let’s assume the facts are as above, but Kevin and Mary are out of time to come within the three year rules for replacing their main residence.

The SDLT would be £34,000 made up of £10,000 ordinary SDLT, £12,000 as the 3% surcharge for an additional dwelling and another £12,000 as the 3% surcharge for non-UK residents.

• Kevin and Mary could recover the £12,000 non-UK residents’ surcharge once they have lived in the UK for the required 183 days after buying the Southampton property.
• They could recover the other £12,000 surcharge for additional dwellings if within three years of buying in Southampton they sell their property in France (provided that the French property had become their only or main residence in the time they lived in it).

POST SCRIPT of 7 January 2020: The election of 12 December 2019 delivered a Conservative majority government.  A budget has been announced for 11 March 2020.  This might well bring in the 3% surcharge for non-UK residents.  It is not clear whether it will come into effect immediately or at a future date.

POST SCRIPT of 12 March 2020: The Budget of 11 March 2020 announced that the new surcharge for non-UK residents buying residential property will be charged at 2% of the property price and will come into effect for purchases completing on or after 1 April 2021.  There is a little about it in the latest set of Case Notes for March 2020 in the entry of 11 March 2020.

Prudential: Buy and then build – 21 Nov 2019

At the annual conference of the Stamp Taxes Practitioners Group (STPG) today (21 Nov) we had a gap to fill.  HMRC had been due to talk for half an hour, but shortly after the announcement of the election said they could not do so because of the General Election Guidance for Civil Servants published on 4 November 2019.

In my role as a “Technical Officer” of the STPG, I suggested instead a debate on the application of the rules in the 1992 case of Prudential Assurance Co Ltd v IRC as it affects “buy and build” arrangements.

Stamp duty land tax is charged on sums paid for the acquisition of land; the issues we discussed arise where, as part of the deal, payment is to be given for building works carried out after the date of the land transfer.  In the Prudential case itself there was a contract to buy land from a seller and a separate contract for the seller to build office buildings for the Prudential after the land had been transferred to Prudential.  It was held that stamp duty was due on both (a) the price contracted to be paid for the land and (b) for so much as was payable for works done up to the date of the land transfer.  The sums paid for works to be done after the date of the land transfer escaped tax.  HMRC have accepted that the same principles apply to SDLT as for stamp duty.

At the conference we debated the limits of the case.  It is not an objection to the favourable treatment that the land sale and the building agreement are in substance one bargain, nor that the parties would not have entered one contract without the other.  There is however a requirement that the land sale is to be “completed independently” of the building contract.  This requires that once the land sale has completed (with ownership of the land passing) it should not be subject to being “undone” in any way on account of the build contract.  If a deal offends this rule then the transaction would be treated as a sale of land with completed buildings for the total of the payments made for the land and for the works. SDLT would be charged accordingly on the total.

The following were all thought likely to mean that the contract for the sale of the land is not sufficiently independent of the performance of the contract to do the building works:

• A provision allowing the seller to retake ownership of the land if the buyer fails to perform its side of the building contract (often seen where the seller is developing a larger site and wants to retain some control of the site sold).
• A provision allowing the buyer to require the seller to buy back the land if the seller fails to perform its side of the building contract.
• A provision providing for a price reduction for the land if the seller fails to perform its side of the building contract.

The position is not so clear if the seller takes a charge on the land from the buyer to secure payment by the buyer of the sums due under the build contract.  Much of the discussion centred on that issue.

Who signs the return when a property is bought for a child? – 18 Nov 2019

We acted recently for grandparents buying a house for two grandchildren.  The house is to be rented out as a long term investment.  The grandchildren are aged under 18 and so the property was acquired in the names of the grandparents with a declaration of trust confirming that they hold on a bare trust for the grandchildren.

It is clear that the higher rates of SDLT apply (with the 3% surcharge being due).  That is because for surcharge purposes the purchase has to be judged as if made by the children’s parents.  The parents already own a property, so the higher rates were due.  The issues centred on the land transaction return.

Although the transfer of the house was into the names of the grandparents, it is clear that the “purchasers” are the grandchildren.  This is confirmed at SDLTM31710 and the grandchildren have to be named on the return as the purchasers and the tax liability is theirs.

The first challenge was to work out how to fill in Q49 – 51 of the return where normally the national insurance number of the lead purchaser would be inserted.  National insurance numbers are allocated within the three months before a child reaches the age of 16.  The children were younger than that and do not have NI numbers.

Guidance at SDLTM62520 says that where there is no national insurance number panels 49 and 50 should be left blank and panel 51 completed with an alternative number, such as a passport number.  A fall back is to call the Stamp Duty Land Tax helpline to be allocated a number.

The second challenge was to establish who should sign the return.  The older guidance on SDLT6 (now superseded) said a guardian (which I believe includes a parent) could sign.  The Manual at SDLTM31900 suggests that a parent or guardian is responsible for obligations of the minor.  Although that page says at the top that it was updated on 24 October 2018 that is not true of the content of the page. This misleading information is a long standing problem affecting many of the Manual pages which HMRC seem unable to fix.  In fact the provision at Finance Act 2003/s106(2) on which the guidance about parents and guardians relies was repealed by the Finance Act 2012 section 222!

The answer seems to lie in Finance Act 2003 / Schedule 16 / para 3 which says that in an acquisition by a bare trustee, the acts of the trustee are treated as acts of the beneficiary.  So the pragmatic answer is for the grandparents as the trustees taking the transfer of the property to sign the return.

What does the Manual say about that?  At SDLTM07300 it says “A nominee or bare trustee is not the purchaser and so cannot sign the declaration. In this circumstance, the actual purchaser must sign.”  The first part of this about the identity of the purchaser is correct.  The second part appears to go too far and in the case of a purchase by a minor the pragmatic solution is for the bare trustee to sign.  Where the legislation and the Manual are in conflict we should apply the legislation and discount the guidance.

POST SCRIPT 1: The Stamp Duty Land Tax helpline is meant to be able to allocate a unique number when an individual has no national insurance number and passport.  In practice it seems difficult to obtain a number from them.  After a long call I was promised a ring back with a number within 48 hours.  The call back never came.

POST SCRIPT 2: I mention above in referring to SDLTM31900 that the page claims to have been updated on 24 October 2018.  Since then pages in the Manual are claimed to have been updated on 21 November 2019.  This gives a false impression that the Manual is kept up to date when this is far from true.

More SDLT when owning a company which owns a property?  – 15 Nov 2019

I am sometimes asked by a buyer whether the 3% surcharge applies because the buyer has a UK limited company which owns one or more residential properties.  The answer is “no”.  In looking at Condition C (that there is another property which “counts against” the buyer) properties owned by a limited company are not relevant.  The point is not directly addressed in the present guidance in the Manual but was confirmed in the pdf Guidance Note which preceded the migration into the Manual in March 2018.  This was not carried forward because of limitations on the layout of the Manual (which frowns on a Q & A format).  Below for the record is the question and answer in Chapter 8 of the guidance of November 2016 which can now be found on the National Archives:

The guidance above preceded the introduction of first time buyers’ relief on 22 November 2017.  It is possible for someone who controls a company owning a property to buy their first home and qualify for first time buyers’ relief if they have never personally acquired a dwelling.  My more detailed paper between examples 3.3.5 and 3.3.6 explains this.  It refers to the guidance for the 2010 – 2012 incarnation of first time buyers’ relief which specifically confirms the point.  That guidance has been archived, but the old page SDLTM29850 can be found here. This confirmed that the relief could be claimed when the purchaser “is a director/shareholder or a company which owns an interest in residential property, provided that no direct interest has been held”.

POST SCRIPT: In December 2019 I came across a number of instances of people querying whether a property held by a company “counts against” the individual who holds the shares in the company.

For example on social media people have referred to SDLTM09780 and the sentence: “Condition C is that the individual purchaser owns, or is treated as owning, a major interest in another dwelling, anywhere in the world, at the end of the day that is the effective date of the transaction.”  There was speculation that “treated as owning” could bring in properties owned by a limited company.  But the legislation is relatively clear as to what counts as owning a “major interest” in a property.  Holding shares in a limited company which owns a property does not presently count.

Even Practical Law, in a piece that month, expressed some doubt over the position, though perhaps that was because the other property was in France held by a French company, a société civile immobilière.  That type of company is shown as “opaque” in HMRC’s “List of Classifications of Foreign Entities for UK tax purposes” at INTM180030 and so perhaps Practical Law were being too cautious.

Multiple dwellings relief: Round numbers – 11 Nov 2019

I was asked a few days ago why the saving for multiple dwellings relief (MDR) for a client worked out as such a pleasingly round number as £10,000.  She is buying a property with a self-contained annex and if multiple dwellings relief is available it will be on the basis of two dwellings. The MDR saving happens to work out as £10,000 for a property anywhere in the price range £500,000 to £925,000.

The way multiple dwellings relief works for two dwellings is that the transaction gains double the benefit of the lower bands of SDLT.  So an extra £125,000 of the price saves 5% SDLT (worth £6,250) and an extra £125,000 of the price saves 3% SDLT (worth £3,750).  These two savings add up to £10,000.  I have written a blog on multiple dwellings relief and the related issues for the higher rates (the 3% surcharge) for properties with granny flats and other subsidiary dwellings.  It links to a more detailed article with worked examples.

First time buyers’ relief: Mixed use property – 8 Nov 2019

I was reminded this week of an apparent discrepancy between HMRC guidance and the legislation on first time buyers’ relief.  It concerns a person who has previously acquired a mixed use property, such as a shop with a flat above it.

Take as an example Fiona who inherited a shop and flat and after owning the property for several years sold it and is now buying a home for under £500,000 to live in.  Here are some points:

• The fact that she did not buy the shop and flat does not help with first time buyers’ relief.  It is any “acquisition” of a “major interest” in a dwelling which can cause the loss of the relief.
• It is important that Fiona no longer owns the property when she buys her home.  Otherwise the higher rates of SDLT (with the 3% extra) would likely apply and that overrides first time buyers’ relief.
• The issue considered here is whether the fact that Fiona had previously acquired a mixed use property, rather than a dwelling alone, rules her out of the relief.

HMRC’s Guidance Note on first time buyers’ relief at chapter 3 para 4 suggests that a previous acquisition of a mixed use property, which includes a self-contained dwelling, denies the relief.  But the legislation appears to say something different; that what was acquired had to be a dwelling alone before the relief is lost.

The issues are explored at section 3.3 of a detailed paper on first time buyers’ relief, especially example 3.3.5 involving Mike and Lin who had previously acquired a pub with managers’ accommodation above it.  The detailed paper can be accessed via this blog.

Ongoing problems with the 3% surcharge for additional properties and second homes – 4 Nov 2019

This blog looks at the latest statistics on tax receipts from SDLT. I take the opportunity to comment on the relative success of the introduction of first time buyers’ relief and on the problems with higher rates of SDLT for additional properties.

In particular I focus on the failure of the higher rates policy to discourage purchases by investors and the problems of misleading guidance on the rules around “replacement of main residence”.

I still have a stream of enquiries from people who are buying a first home to live in and who find it hard to believe that the fact that they have another property (often one they have never lived in) means that the extra 3% SDLT is due.

Despite promises to do so, HMRC have failed to amend the application form for a refund where the later sale of an old home means that an earlier purchase of a new home is no longer liable to the extra 3%. The form still does not say that for a refund to be due the old home must have been lived in as the person’s only or main residence at some point in the three years leading up to the purchase of the new home.

Buying a holiday cottage with planning conditions – 28 Oct 2019

There has been a change in the HMRC guidance on the meaning of “residential property” relating to the relevance of planning conditions limiting property to holiday use.  The consequences can be significant.  A property bought for £600,000 would attract SDLT of:

• £38,000 if it counts as an additional residential property so that the “higher rates” of residential SDLT (with the extra 3% SDLT) apply
• £19,500 if it counts as non-residential property.

The 3% surcharge only applies to the purchase of “dwellings”.  A key part of the definition is that a building or part of a building is a “dwelling” if it is “used or is suitable for use” as a dwelling.  It is the nature of a “dwelling” that it is (or could be) a person’s “residence”, involving a degree of permanence of occupation.  Broadly speaking, a “residence” involves a property being a person’s home.  A property being occupied on a short term basis, such as for a holiday, is not being used “as a dwelling” (though its physical configuration may well mean that it is suitable for use as a dwelling and so is within the statutory definition which is on an “either/or” basis).

A holiday cottage would often have a kitchen, bathroom and all the services and facilities one would expect for a dwelling.  The services (such as heating, electricity and water) might well be sufficiently capable of independent operation and isolation for it to count as a dwelling.  An issue with a holiday cottage can be whether legally it cannot be used as a dwelling because of planning restrictions.  Another issue is the weight to be given to the planning restrictions when weighing up whether a property counts as a “dwelling” for SDLT purposes.

Many properties bought for holiday use do not have planning conditions limiting their use to holiday purposes.  Even if used in a holiday lettings business or if rented out commercially, a property without such restrictions would likely remain “suitable for use” as a dwelling and so be within the definition of a “dwelling”. (The definition of a “dwelling” is that either it is used as a dwelling or alternatively it is suitable for use as a dwelling; either one will do.)  The purchase of a dwelling would be liable for the higher rates of SDLT if it counts as an additional property for the buyer or is bought by a company.

One sees a variety of conditions imposed in planning consents limiting the use of holiday properties in different ways.  For example a condition might be that the property “shall not be occupied as a permanent dwelling or by any persons for a continuous period exceeding 28 days in any calendar year”.  Sometimes that is coupled with a requirement to maintain a record of all the occupants of the units and to disclose those on request to the planning authority.  Or there could be a condition that the property will not be occupied during a specified month each year.

Other wording could be less restrictive.  For example consider a requirement that properties “shall be used to provide holiday accommodation only and they shall not be used as permanent unrestricted accommodation or as a primary place of residence”.  That might arguably allow the buyer to use the property as a second home, which they use for holidays.  Perhaps that could be use “as a residence”, though not as a main residence.

The longstanding guidance in the section of the HMRC Manual on the 3% surcharge at SDLTM09750 states that a holiday home which cannot be used all year round is still a dwelling for the purposes of the 3% surcharge.  That is thought to overstate HMRC’s position and is likely to be amended in due course.  HMRC’s views have been expressed recently in the guidance they added to the Manual on 1 October 2019, especially SDLTM00385, see key paragraphs from that below.  SDLTM00385 relates to the general FA03/s116 meaning of “dwelling” within the definition of “residential property” rather than the specific FA03/Sch4ZA definition of dwelling for the purposes of the 3% surcharge, but if a property counts as “non-residential” for the purposes of s116 it would be extraordinary if it counts as a “dwelling” for the purposes of the higher rates.

Planning restrictions are therefore a relevant factor in establishing whether a property is suitable for use a “dwelling” but are not determinative.  All factors would need to be weighed up.  Factors to look out for to support a return based on the property counting as non-residential would be:

• Is there an established pattern of holiday lettings?
• Is there active ongoing holiday use, such as bookings which are being taken on from the previous owner?
• No-one is living in the property as their home at present?
• How tight are the planning restrictions?  For instance do they prevent any one person occupying the property for more than say 28 nights in any one year?  Or perhaps they are less tight, for example just prohibiting occupation for the month of January each year.
• Have the planning restrictions been complied with?
• Are the planning restrictions enforceable still?
• Would the planning authority be expected to enforce the planning restrictions if breached?
• Would it be difficult to get the planning restrictions released?
• Is the property subject to non-domestic rates rather than to council tax?

Aside:  It is only a “building” or part of a building which can count as a “dwelling”.  Someone buying a site with a caravan or mobile home is not buying a “dwelling”.  The issue of whether a mobile home is sufficiently “attached” to the ground as to become part of the property is discussed in the Manual at SDLTM09745.  Typically someone buying a site and a mobile home should apportion the price between the land itself (which is assessed for SDLT at non-residential rates) and the mobile home (which as a “chattel” is not liable to SDLT at all).

Elbowing out an existing lessee to create a larger corner unit – 23 Oct 2019

The following example illustrates some of the issues around overlap relief for SDLT and linked transactions.  Meet the following parties:

• High Street Investor Ltd (HSI): who owns Unit 3 (which is vacant) and the adjoining Unit 4 (leased to Get Out of Here Ltd)
• Get Out of Here Ltd (GOH): a retailer who took a 15 year lease 5 years ago of Unit 4 at an annual rent of £50,000 and who paid £4,258 in SDLT
• Corner Sites Ltd: a retailer keen to take Units 3 and 4 and combine them into a single outlet.

A deal has been discussed where HSI is to receive £350,000 from Corner Sites.  Further, HSI is to pay £250,000 to GOH to induce them to surrender their lease of unit 4 (Corner Sites to pay HSI £250,000 to cover this cost in addition to the £350,000).  HSI would then grant a lease of Units 3 and 4 to Corner Sites on a 15 year lease at an annual rent of £120,000.

Two ways of structuring the deal are as follows:

Route 1

1. HSI take a surrender from GOH of the lease of Unit 4 with GOH being paid £250,000 funded by Corner Sites.
2. HSI grant a 15 year lease at a rent of £120,000 a year of Units 3 and 4 to Corner Sites, being paid a further £350,000 by Corner Sites.

SDLT analysis:

• HSI acquire a chargeable interest from GOH (the lease taken by surrender) for £250,000 and so pay SDLT of £2,000.
• Corner Sites have paid £600,000 for the grant of the new lease (the £250,000 is chargeable consideration for the new lease even if paid directly to GOH).  The SDLT on that premium is £19,500.
• Corner Sites take a lease for 15 years at a rent of £120,000.  The net present value of the rent is £1,382,089 and the SDLT (no overlap relief available) is £12,320.
• GOH are not able to recover any of the SDLT paid on their old lease which they have surrendered.
• The acquisitions by HIS (by taking the surrender of the old lease) and by Corner Sites (by taking the new lease) are not “linked transactions” as HSI and Corner Sites are not “connected persons”.

This gives total SDLT of £33,820.

Route 2

1. Corner Sites take an assignment from GOH of the existing lease of Unit 4, paying GOH £250,000.
2. HSI in a surrender and regrant transaction with Corner Sites grant a 15 year lease at a rent of £120,000 a year of Units 3 and 4, being paid £350,000 by Corner Sites.

SDLT analysis:

• Corner Sites acquire a chargeable interest (the lease taken by assignment) from GOH for £250,000 and so pay SDLT of £2,000.
• Corner Sites pay HSI £350,000 for the grant of the new lease, the SDLT due on that premium is £7,000.
• Corner Sites take a lease (as part of the surrender and regrant) for 15 years at a rent of £120,000.  Overlap relief applies, as credit is allowed for the first ten years in respect of the £50,000 per annum rent already taxed.  The net present value of the rent allowing for overlap relief is £966,259 and the SDLT on that is £8,252.
• HSI do not have to pay any SDLT on the “surrender” leg of the surrender and regrant.
• The acquisitions by Corner Sites from GOH and from HSI are not “linked transactions” as GOH and HSI are not “connected persons”.

This gives total SDLT of £17,252.

Conclusion

Proceeding by Route 2 offers a substantial saving in SDLT over Route 1 for three reasons:

• It avoids the double taxation of the £250,000 funded by Corner Sites which on Route 1 is treated as consideration for the new lease as well as a payment to GOH to induce them to surrender the old lease to HSI.
• It splits the £600,000 paid by Corner Sites into two capital payments to unconnected persons for different property interests.
• It allows overlap relief to be applied; this is a relief where SDLT has been paid on the lease being surrendered; it is no objection that the old lease has been acquired by assignment.

Sports club incorporating into a company limited by guarantee – 21 Oct 2019

I have been looking at the SDLT issues for a sports club, with valuable property assets, which wishes to incorporate.  The club is presently an “unincorporated association” with trustees holding its property on behalf of the members in accordance with the clubs rules.  The club intends to incorporate as a company limited by guarantee; perhaps it will register as a Community Amateur Sports Club (CASC).  The new company will not be a charity and so there is no charities relief available, nor is group relief or any other special relief applicable.

Whether the amount of SDLT is prohibitive will depend on assessing the “chargeable consideration” for the acquisition of the property by the new company.  Perhaps there will be none, or it will be low enough to be affordable.  Elements to consider are:

• Whether the company pays a price for the property (or promises to do so, with the amount being left outstanding as a debt).
• Perhaps there is a mortgage which the company takes on from the club, in which case the amount of the debt assumed by the company is taken as “chargeable consideration” given by the company.
• Normally when individuals transfer a property to a company with which they are connected, the market value of the property is taken as the chargeable consideration (Finance Act 2003 / section 53).  However there are some exceptions.  One is that the transferor is a “company” and that the transaction is part of a “distribution of the assets” of that company.  Whilst an unincorporated association is not a “company” for the purposes of group relief, it is a “company” for the purposes of this exception and so sometimes an exception from this market value rule can apply.
• Perhaps there is a tenancy or lease to be granted by the company limited by guarantee as consideration for the transfer of the property to it.  If so the “exchange of land” rules could bring in the market value of the property as chargeable consideration.

The provisions are complicated and their application is dependent on the facts and the way the incorporation is carried through.

Announcement of a Budget on 6 November – 14 Oct 2019

Today (the day of the Queens Speech for the new session of Parliament) it has been announced that the 2019 Budget will be on Wednesday 6 November.  It remains to be seen whether the present Government is in office to deliver the Budget.  By convention the ‘Provisional Collection of Taxes’ motion is passed by the House immediately after the Budget speech so that changes can come into effect at 6pm on Budget day.  But we appear to be in an era where it cannot be taken for granted that conventions will be followed.

Legislation usually follows in the shape of a Finance Act as income tax and corporation tax are annual taxes and could not otherwise be levied the following financial year, though for an interim period they can be collected under the Provisional Collection of Taxes motion.  However the next financial year does not start until April 2020, so the timing of the Budget (now in the autumn before rather than the spring just before the new financial year) gives more leeway.

POST SCRIPT: On 25 October 2019 news came out that the Budget would not go ahead on 6 November, despite the Chancellor having said the day before that the Budget would go ahead despite the Brexit deadlock in Parliament.  The decision was confirmed in a letter from the Chancellor to the Treasury Select Committee available here.

FURTHER POST SCRIPT of 7 January 2020:  A budget has been announced for 11 March 2020.

Surrender and Regrant of Agricultural Tenancies – 14 Oct 2019

Tomorrow I am giving two presentations on SDLT at a residential and commercial conveyancing update 2019.  There is a particular focus on agricultural property, so I have updated my paper on the SDLT issues arising out of surrenders and regrants of agricultural tenancies.

These transactions are sometimes undertaken for estate planning reasons so as to improve inheritance tax relief (especially agricultural property relief from IHT) where a tenancy under the Agricultural Holdings Act 1986 has inherent value. The tenancy can sometimes be replaced with another AHA tenancy, or alternatively with a farm business tenancy.  The TRIG reforms made this easier in terms of the landlord and tenant issues.

The surrender and regrant is in principle an “exchange of land interests” with each of the:

• landlord taking the surrender of the old AHA tenancy and
• tenant taking the grant of a new AHA tenancy or an FBT

being liable to SDLT on the inherent value of the land interest acquired (as well as any payments made to the other party).

There is an exception to the SDLT market value “exchange rule” if the parties match, but there are traps to look out for, especially where is a change of tenant, where a partnership is involved or the property interests are held on bare trust.

If one of the parties is a company “connected” to the other party then a different market value rule might apply under Finance Act 2003 section 53.

There could also be SDLT for the tenant to pay on the net present value (NPV) of the rent payable under the new FBT or AHA 1986 tenancy.  The NPV of the rent does not benefit from surrender and regrant “relief”.

The “growing lease” treatment can apply to a lease with security of tenure.  For example an FBT granted for a term of six years at a rent of £20,000 would not initially require notification as the NPV is below the threshold of £150,000.  However if the lease runs on then the lease is treated as being for a year longer on each anniversary.  So at the end of sixth year it is treated as a lease for seven years, at the end of the seventh year as a lease for eight years and so on.  The first land transaction return will be needed as a consequence of the eighth anniversary (when it is deemed to be a 9 year lease) which first takes the net present value over £150,000 and causes SDLT to be payable.

POST SCRIPT: A paper on the issues is now available here.

Modern Method of Auction – 11 Oct 2019

I have in the last week twice come across the use of this method of sale for residential property.  A fee (typically 3.5% of the price or a minimum of £6,000 inc. VAT) is paid by the “winner” of the auction who gets a “reservation agreement” and 56 days within which to negotiate a sale and purchase contract and to complete the transaction.

The fee is shared between the company running the auction and the estate agent who uploads the property details.  The price which is bid has to be paid in full (assuming a sale and purchase contract is later exchanged) without credit for the fee.

The information provided by the company running the auction says that SDLT may be due on the non-refundable fee as well as the price which is bid, even though it is only the price which is bid which goes into the contract and transfer.  My analysis of the terms of the “reservation agreements” and the auction terms and conditions I have seen is that a reservation agreement:

• Is not a contract for the sale and purchase of land.
• Is not an option to buy land nor a pre-emption agreement.
• Is most akin to a lock-out / exclusivity agreement, though it has terms obliging the seller to use all reasonable endeavours to enter into a sale and purchase agreement.

There is a strong argument that the non-refundable and non-deductible fee is not paid for any kind of land interest and is not paid for the property, but is paid for the reservation agreement only.  The reservation agreement gives the buyer some important rights, in particular the seller is not allowed to deal with other parties and has to take steps to progress the sale process.

For SDLT purposes one would need to apportion the sums paid for the reservation agreement and for the property on a just and reasonable basis.  It seems defensible to apportion them in the way in which the parties have documented them, particularly as the figures are set in an open auction.  That would mean that SDLT is only due on the price as set out in the contract and the transfer and not on the reservation fee.

In the Taxation magazine of 3 October 2019 a Question and Answer suggests that this structure can make the whole transaction taxed at the lower “mixed rates” of SDLT!  I do not agree with this, residential rates of SDLT will apply where residential property is bought.

HMRC guidance on the meaning of “dwelling” for SDLT – 2 Oct 2019

HMRC yesterday published in the SDLT Manual on pages SDLTM00360 – SDLTM00430 more about “dwellings”; the new guidance pages can be accessed from this index page.  In particular they cover:

• SDLTM00380: The interaction between the “used as a dwelling” test and “suitable for use as a dwelling” test.
• SDLTM00385: The relevance of planning conditions is given more prominence than in the earlier guidance.  They give the example of a holiday chalet where only short stays are permitted.
• SDLTM00385 also deals with a property that is no longer habitable as a dwelling.  These were the issues arising in the Bewley case.  They say that whether a property is derelict to the extent that it no longer comprises as dwelling is a question of fact and should only apply to a small minority of buildings.  It gives examples of things which could easily be addressed in the short term: switching on services and infestations of pests.
• SDLTM00390 and SDLTM00395 deal with cases where a building is used partly as a dwelling and partly for other purposes (they give the example of a doctor’s surgery).  HMRC say that suitability for residential use can override an actual ongoing non-residential use.
• SDLTM00400 deals with properties in the process of being constructed or adapted for use.  HMRC say that a property counts as a “dwelling” for SDLT as soon as building works on the foundations begins.
• SDLTM00410 to SDLTM00430 state HMRC’s view on how to assess whether a property with an annex or outbuilding counts as one dwelling or as two dwellings.

Which property is a student’s “residence” when they are at university? – 30 Sep 2019

A blog on the Bank of Mum and Dad looks at the question of which property is a student’s main residence while they are at university: the house they share at university or the family home?  In the blog the question is examined in the context of whether a student buying a property to live in when at university would qualify for first time buyers’ relief for SDLT.  The relief requires the student to intend to live in the property acquired as their “only or main residence”.  The issue would also be relevant for capital gains tax on a sale of the property if a gain is realised on a disposal.

Since posting the blog I have found a little more about the issue of the “residence” of a university student.  The voter registration case of Ricketts v Registration Officer for the City of Cambridge in 1970 said that a Cambridge University student was “resident” in the city on the key date (10 October) for the purposes of voter registration and extracts from Lord Denning’s judgement in the case about what is a person’s main residence are quoted with approval in the HMRC capital gains tax manual at CG64455.

The Scottish Taxpayer Technical Guidance by HMRC (for the purposes of the Scottish rate of income tax) at STTG4400 has some examples of where taxpayers are “resident” for income tax purposes. The examples involving Solomon and Rebecca are for university students. Solomon returns to the family home in vacations and HMRC say his main place of residence is the family home. Rebecca stays at the house she shares with friends in the university town whilst working over the vacations; HMRC say her main residence is that shared house.

The fact that a property is being bought in the university town to live in itself suggests a greater degree of permanence and expectation of continuity than would normally be the case with university accommodation.

Stamp duty land tax helpline tip – 27 Sep 2019

The HMRC helpline for Stamp Duty Land Tax on 0300 200 3510 sometimes appears to be creaking under the strain of calls.  They report having received just under 50,000 calls in the four months up to July 2019.

Often after a long introductory message and being invited to select various options, the call is disconnected. HMRC say they are seeking to recruit more staff and are beginning to handle calls at Birmingham as well as in Glasgow and Cardiff.  One tip is to avoid calling at peak times; HMRC the say the peak times for calls are 9 – 11 am and 2 – 4 pm.

POST SCRIPT: The lines are open Monday to Friday: 8:30am to 5pm.

HMRC update the guidance on the 3% surcharge replacement exception – 26 Sep 2019

The guidance on the higher rates of SDLT for additional properties at SDLTM09800 has been updated by HMRC this week.  They have corrected an error about the circumstances in which a person can rely on a sale or other disposal by a spouse or civil partner of a property the person had lived in.  The previous version had suggested that the spouses / civil partners needed to be “living together” at the time in order to rely on the sale or disposal.  There are complications to the replacement exception which are discussed here and there is a full case study here of someone who HMRC initially thought should be charged the extra 3% on the basis that the property she had sold had not been her most recent home.

Completion return when actual completion follows a substantial performance – 24 Sep 2019

I was checking how to notify HMRC of completion when an online return SDLT1 has already been submitted because of substantial performance ahead of completion.  In the HMRC stamp duty land tax manual at SDLTM07800 it says that a paper completion SDLT1 should be sent to the Stamp Office at BT – Stamp Duty Land Tax, HM Revenue and Customs, BX9 1HD United Kingdom with a covering letter and a copy of the previous SDLT1 which notified substantial performance.

However SDLTM50250 says that a further return will be required where there have been changes between substantial performance and actual completion resulting in a different amount of tax now due. This page says this further return should be a letter to the Stamp Office and should contain the following details:

• UTRN of original return
• Details of the new calculation
• If additional tax is due, an appropriate payment
• If a refund is due, claim for the amount overpaid

I called the helpline who confirmed that a “further return” should be posted even if there is no change to the amount of tax due.  It should just be way of letter with a copy of the previous return and the UTRN.  There is no need for a new SDLT1.  If there have been no changes to report then the letter should say this and should give the actual completion date.

Returns for a single transaction comprising a freehold and a leasehold property – 21 Sep 2019

A house is being bought which has two registered titles: the house itself is a freehold title and the garage is registered under a leasehold title.  A single price had been agreed for the whole and there is to be a single contract and transfer.  However two land transaction returns will be needed to notify the single transaction!  That is because the HMRC software is not capable of combining freehold and leasehold interests on a single return.  So an apportionment of the price is needed (on the returns only, not on the contract and transfer) and two returns are needed, one for each interest.  At panel 13 each should state there is a “linked transaction” and state in panel 13 the combined price.  Each return will be for part of the price and give part of the overall SDLT is due.

This is a “work around” as in reality there is only one transaction, but staff on the HMRC SDLT helpline 0300 200 3510 confirm that they require two returns in this way.

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.