The last decade has seen multiple layers of complexity added to Stamp Duty Land Tax (SDLT) on residential purchases, leaving many taxpayers unsure of their liability. This uncertainty is often uncovered late in the day, when financing extra tax is unwelcome, although sometimes there is a reduction in the anticipated SDLT, which is a nice surprise. So what do purchasers and their legal advisers need to think about when entering into a purchase?
Is the property residential?
Over the past few years there has been considerable movement in this area, in part prompted by some claims farms submitting dubious amendments to generate refunds for taxpayers. As a result, HM Revenue and Customs (HMRC) have litigated many cases to try to close the door on incorrect claims. Key areas of interest are derelict properties (unsuitable for use as a dwelling) and mixed use. The goalposts have moved in these areas, as the case law has narrowed the scope for securing these treatments.
Purchasers should be wary of “no win, no fee” arrangements, where a refund may initially be paid by HMRC, but a later enquiry could result in this being repayable, with interest (8.5% at the date of this article) and potentially penalties. A claim is not formally “accepted” by HMRC unless there is an enquiry, so beware of advisers saying otherwise.
Where there is genuine commercial use of part of a property then mixed use may still apply but this needs a careful examination of the facts in each case and the gathering of evidence to support the position.
Do the higher rates apply?
This is the most common area of uncertainty. We see both over and underpayments where the position has not been fully and correctly analysed. For example, one of the purchasers holds certain types of usufruct rights over an overseas property, which wouldn’t count as a major interest in another dwelling, but the 5% surcharge is paid as this isn’t looked at carefully.
There is often confusion around purchases by married and unmarried couples, where it is important to ask the correct questions to ascertain whether the surcharge is applicable.
Often the standard questionnaires about a purchaser’s property position cannot obtain sufficient information to determine the SDLT.
Is First Time Buyer Relief available?
We often see cases where an adult child has acquired a share in a dwelling from their parents, which potentially stops the relief being available. This is something to consider before making a gift, as this could cause the surcharge to apply to the child’s future home purchase.
Does the non-resident surcharge apply?
For individuals it is often clear whether or not they are UK resident for SDLT purposes, but where the purchaser is a company the residency of the owners of the company needs to be examined to decide whether the surcharge applies.
Is the purchaser a company?
Companies buying a dwelling for over £500,000 need to tread carefully to check whether they are caught by the 17% flat rate of SDLT, as well as being within the Annual Tax on Enveloped Dwellings (ATED) regime. The ATED regime requires returns to be filed, even if there is no annual tax charge, and late filing penalties can rack up where these returns are missed for several years.
Other tricky areas
The involvement of debt on transfers of equity, staircasing to 100% to sell, incorporation of a property portfolio and lease extensions involving a company owning the freehold are all areas which need careful consideration to avoid unexpected tax implications – not only SDLT, but a variety of other taxes too.
We would recommend that if there is any uncertainty about the SDLT position that advice is sought as soon as it is clear than the purchase will be proceeding, to reduce uncertainty and stress as well as avoiding delays in the purchasing process.
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