Managing stamp taxes compliance has become a whole lot harder.
The manner in which stamp duty was enforced meant that residential property conveyancers historically administered the charge. That has endured under stamp duty land tax (SDLT), stamp duty’s successor. But recent changes to the SDLT rules on residential property transactions and the devolution of the tax have created regimes that are challenging even to a tax specialist.
What is a dwelling?
For many years the rates of SDLT on transactions in residential and non-residential property were the same. The only difference was a marginally different nil rate band. That changed in 2010 when the top rate for residential property transactions increased to 5%. More changes to the residential tax rates were made in 2012, 2014, 2015 and 2016.
The result is that the tax rates for residential and non-residential property transactions are now strikingly dissimilar. The maximum marginal rate of tax for residential property transactions is 10% higher than the maximum marginal rate of tax for non-residential property transactions. So understanding which rates of tax apply is important. But this is sometimes hard, especially for the following types of property:
1. live/work units;
2. country estates;
3. assisted living homes;
4. serviced apartments;
5. communal accommodation; and
6. dwellings in the process of construction or adaptation.
The legislation on the meaning of dwelling is out of date. Consequently, having an awareness of HMRC practice is vital.
SDLT super rate
A flat SDLT rate (the super rate) of 15% applies to purchases of single interests in dwellings worth £500,000 by companies. It was designed as an entry charge, being three times the then top rate of tax on residential property transactions; and it was a response to the difficulties in enforcing the tax on sales of special purpose companies.
That concept has been eroded for purchases of high-value dwellings by the successive rate increases that have occurred since the super rate was introduced. The difference between the super rate and the maximum marginal higher rate is now only a fraction of a percent. Nevertheless, the super rate potentially applies whenever the buyer is a non-natural person.
Exceptions exist for certain types of business use. But specific conditions need to be met, both initially and for three years afterwards. The incidence of the super rate may not be obvious and a withdrawal of the exception may be overlooked.
Take, for example, a group that buys residential property for development and resale. It uses a new company to buy and hold a dwelling for reasons that include financing. After the development has completed, the group sells the dwelling to a third-party individual for personal occupation. The buyer (reasonably) chooses to buy the shares in the company that owns the dwelling to save SDLT.
Unless advised properly, the buyer would be unaware that the exemption from the super rate would be withdrawn on his purchase of the shares, meaning there is a hidden tax liability in the purchased company. Why would he know? After all, the exemption was properly claimed by the company during the seller’s ownership of the company.
The purchase of multiple dwellings can affect both which rates of SDLT apply and the amount of tax to pay. The rules vary depending on the number of dwellings purchased and whether or not:
1. the dwellings are purchased in one transaction or a series of transactions;
2. the dwellings are used for residential accommodation for students;
3. the dwelling is part of another dwelling; and
4. the dwelling is ‘subsidiary’ to another (for example, a granny annex).
Three sets of rules interact: multiple dwellings relief, the higher SDLT rates (see below), and the rule that deems the purchase of more than five dwellings as a commercial property transaction.
One accountancy firm is writing to buyers offering ‘no win, no fee’ reclaims, based on the possibility that the buyers have overpaid SDLT on the purchase of multiple dwellings.
The higher SDLT rates (3% on top of the standard rates) for purchases of additional dwellings by individuals and dwellings by companies introduced this year are causing particular confusion. It is easy to see why. They contain various deeming rules: for example, they deem individuals to own dwellings they do not and deem individuals not to own dwellings they do. In some cases, the only reason why a transaction is taxed at the higher rates rather than the standard rates is the timing or order of the events. And the rates can apply to the purchase of an interest in a dwelling that is already used as the buyer’s main residence (for example, lease renewals and inter-spouse transfers).
The author recently corrected some published material on the higher rates written by a tax generalist. So, respectfully, what hope is there for conveyancers to get it right?
The concept of linked transactions affects:
1. which tax rates apply to a transaction; and
2. the amount of tax payable on a transaction, both initially and potentially retrospectively.
These effects are not obvious. Where there is an interval between the linked transactions, the retrospective impact of the rule on the earlier transaction may easily be missed.
Transactions are linked if they form part of a single scheme, arrangement or series of transactions between the same parties or connected persons. Determining when transactions are linked is a question of fact and often sensitive to a purposive interpretation of the legislation.
Since April last year, SDLT on land transactions in Scotland has been devolved. The Scottish tax, land and buildings transaction tax, is materially different from SDLT in areas that include:
2. tax rates and tax bands; and
3. purchases of additional dwellings and dwellings by companies.
Those advising on transactions in property on both sides of the border need to understand the extent to which the rules differ.
From April 2018, SDLT on land transactions in Wales will be devolved. Consequently, in less than two years there will be three stamp taxes regimes for UK land transactions.
Those tackling the stamp taxes consequences of a land transaction must know what they do not know. In the past, all that was required to administer stamp taxes in most residential property transactions was knowing the purchase price, the tax rates and an awareness of the linked transaction rule. In contrast, one must now know things that include:
1. the number of purchased dwellings;
2. the value and situation of any annex;
3. the type of purchaser (company, partnership, collective investment scheme or trust);
4. the type of purchasing trust;
5. the age and interest of the beneficiary under a trust;
6. the marital status of the buyer;
7. the state of the buyer’s marriage;
8. the ownership of other dwellings anywhere in the world by the buyer, their spouse or civil partner, or their children;
9. the intended use of the purchased dwelling; and
10. the home ownership history of the buyer, their spouse or civil partner.
And this ignores:
1. the Disclosure of Tax Avoidance Scheme rules;
2. the Promoters of Tax Avoidance Schemes rules;
3. the SDLT general anti-avoidance rule;
4. the general anti-abuse rule;
5. the general anti-avoidance rule for LBTT; and
6. the proposed enablers of tax avoidance schemes rules, which, with the exception of the penultimate item, potentially apply to commercially driven SDLT transactions.
If they have not already done so, residential property conveyancers need to check whether they can continue to manage stamp taxes compliance in-house and, if not, consider outsourcing all or part of it to specialist tax advisers. If they do not, the consequences for some will almost certainly be litigation or HMRC investigation for non-disclosure.
Sean Randall CTA (fellow) is the head of stamp taxes at KPMG, and the author and editor of Sergeant and Sims on Stamp Taxes