There had been much rumour and speculation before last week’s budget about changes to property taxes. Many expected major changes to stamp duty land tax (SDLT). Kemi Badenoch had already announced that a Tory government would abolish the tax entirely – and it seemed feasible that chancellor Rachel Reeves would take the bait. Instead of wholesale reform of property tax, however, we have been given the so-called ‘mansion tax’ – the thornier issue of SDLT has been left untouched.
It is no secret to anyone involved in conveyancing or providing tax advice that SDLT is unsatisfactorily complex and confusing. Since its introduction by the Finance Act 2003, there has been near-endless tinkering, tweaking and amendment of the tax and its reliefs. Add to that the post-Covid SDLT ‘holiday’, and it is little wonder that even well-informed clients are often nonplussed by their tax liability. While the budget has not offered further changes to the SDLT regime, many property practitioners will be wondering whether this was a missed opportunity.
Who advises?
In the immediate aftermath of Angela Rayner’s recent SDLT debacle, there was much speculation about what tax advice Rayner had received (or not) and from whom. This highlighted a common and problematic theme: SDLT is an issue that often falls between two stools.
Most conveyancers’ retainers will doubtless make clear that tax advice is not included within their scope of work. Yet one wonders how fully clients take that on board. Almost inevitably, it will be the conveyancing lawyer who asks the client whether they are a first-time buyer, whether they own other property and so on; it is the conveyancer who will draft the SDLT1 for the client to approve; the law firm’s client account to which the client sends the money to pay the tax; and the conveyancer who submits the tax return and sends the payment to HMRC.
Is it any wonder, then, that many clients might overlook the fact that – although they have had numerous interactions with their conveyancers about SDLT – they have nonetheless not been advised on it.
Limits of conveyancing advice
It falls to conveyancers to remain alive to complex SDLT issues throughout a purchase. Crucially, conveyancers must not be afraid to remind clients of the limits of their retainer, and refer them to, say, accountants or counsel, as the need arises.
The race to the bottom in so much conveyancing pricing is deleterious in many ways, not least in setting an expectation that the legal fees for the whole process of buying a house should be neatly packaged as one (cheap) amount. The reality, of course, is that transactions and clients’ circumstances are often considerably more complex than is apparent at the start of a transaction, however carefully the work has been scoped. Conveyancers must remind their clients that they might well need to spend additional time and fees on additional, specialist tax advice, however unpalatable that might sometimes be.
The complexity of the SDLT regime means that specific tax advice is often essential for clients whose circumstances are even slightly out of the ordinary. Time spent overseas, involvement in property-owning trusts, and legislative changes to available reliefs all combine to complicate a situation that many clients might assume to be straightforward. It is inconceivable that the headache and expense to HMRC of remedying genuine errors is not exacerbated by the complexity of SDLT.
Alternatives
There can be little doubt that SDLT is ripe for reform, but Reeves has shown little appetite for wholly rethinking property taxes.
But if SDLT were to go, what would replace it? SDLT is a huge source of revenue for HMRC: the government’s own figures put SDLT receipts for the year ending 2024 at around £12bn. Clearly, any alternative property tax will need to plug that gap.
Any capital gains-style tax on sale would surely be fatally unpopular. It would be likely to have the biggest impact on older voters, many of whom bought for a song decades ago and now find themselves living in houses worth, in some cases, millions. It would also surely act as a further disincentive to downsizing, particularly for older homeowners with an eye on estate planning and the mitigation of likely future inheritance tax liability.
It is risky to speculate about the chancellor’s rationale for introducing the ‘mansion tax’, but it might conceivably have seemed like the most readily palatable option. At first glance, it might seem ‘fairer’ than, say, a tax on sale. As has been clear from much of the press coverage, however, it is easily characterised as penalising older homeowners, whose long-owned houses have in some cases increased in value by near-unimaginable amounts, simply by accident of geography.
Better the devil you know?
It would surely have been possible for Reeves to reshape SDLT in such a way that would be both easier to administer and more readily comprehensible to the layperson. The chancellor’s decision to retain the current SDLT regime is perhaps an acknowledgement of what a herculean task such reform would be.
Such a reassessment of the current regime would need to take into account the vicissitudes of the UK property market, for example. A realistic limit for any kind of first-time buyer relief in, say, Birmingham is likely to be woefully inadequate for someone buying an equivalent type of property in London. How would those very differing landscapes be accommodated?
If reform of UK housing taxes is to be effective, it will require serious, long-term planning from a government of any colour. Given the current political mood, it is understandable that Reeves has opted for perhaps the least dramatic intervention to property tax that she could have made.
Cordelia Smith is an associate at Hunters, London
No comments yet