Now that the most recent SDLT rush is over we are sure that many conveyancers would be happy never to hear or talk about SDLT again, but SDLT is something which should always be given very careful consideration as the potential repercussions if the SDLT treatment is wrong can be costly for your client and for your firm.
There are a number of SDLT mistakes that we regularly encounter, here are some of the most common areas where mistakes can occur in applying the legislation.
Does the higher rate of SDLT apply to the purchase?
If your client is purchasing a second or additional home higher rates must be considered. Here are some additional issues that the conveyancer should consider.
What will cause higher rates to be apply?
Any company purchase and any purchase by individuals which results in any of the purchasers, or their spouses, owning an interest (could be co ownership) in more than one residential property (which has a value above £40,000) anywhere in the world.
Has there been a replacement of a main residence?
To avoid initial payment of the higher rate a purchaser must dispose of (sell or transfer) a major interest in a property they lived in as their previous main residence on the same day as, or in the 3 years preceding, the purchase of their new main residence. To qualify as their previous main residence the purchasers must have lived in that property as their only or main residence at some point during the 3 year period leading to its sale.
Consider a client who has a number of buy to let properties, is purchasing a new property which they intend to live in and has recently sold a property they once lived in as their main home. It appears that the new purchase will be a replacement of a previous main residence due to the fact they sold a property which used to be their home, however, for the last 10 years the purchasers have lived in a property they rent abroad whilst the UK previous main residence was rented out prior to its sale. This means that the purchase will not be a replacement of the previous main residence because they had not lived in the sold UK property as their main residence at some point during the 3 years immediately preceding the sale, meaning the higher rate will apply.
Does the 17% higher rate apply to a company purchase of residential property?
Yes, the reduced higher rate of 5% (formerly 3%) for companies only applies if relief from the 17% higher rate is available. Relief is available in very strict circumstances which are:
- The property is worth less than £500,000.
- The property was purchased by a qualifying housing co-operative.
- The property was purchased by, and to be used as part of, a property rental business.
- The property was purchased by a property developer or trader to be sold on.
- The property was purchased to be used in a trade involving making the property available to the public.
- The property was purchased by a financial institution in the course of lending.
- The property was purchased to be occupied by employees of the purchaser.
- The property is a farmhouse.
There are a number of conditions which would need to be met at the time of purchase for relief to apply and the relief is subject to withdrawal if the relevant conditions are no longer met within a qualifying period.
ATED
For residential property purchased by a company which is worth over £500,000 an annual ATED return must be submitted and the tax paid based on the value of the property and HMRC’s banding system. The return is due by 30 April each year if the property is within the scope of ATED on 1 April, or within 30 days of acquisition if the property comes within the scope of ATED after 1 April. There is also a duty to revalue the property every 5 years and amend the amount due accordingly.
If the property is eligible for a relief from the ATED charge the purchaser must still apply for an exemption within 30 days of the purchase and by 30 April every year by submitting a Relief Declaration Return.
What about Subsidiary Dwellings?
Following the abolition of Multiple Dwelling Relief on 1st June 2024 (in England) you may think that this is no longer an issue, but it is still relevant to the higher rate. It can be a complicated task to ascertain whether a property will be classed as 2 or more dwellings and, if so, whether the second dwelling (within the curtilage) could be considered to be a Subsidiary Dwelling and thereby not count as a second property in order to negate the higher rate.
For Welsh transactions Multiple Dwelling Relief is still applicable after 07/02/2025 but only if the second property is NOT a subsidiary dwelling.
Non-residential rate of SDLT
There are occasions when a purchase of a residential property will not be liable to the residential rate of SDLT.
Are 6 or more dwellings being purchased in the same transaction or a linked transaction?
A purchase consisting of 6 or more dwellings allows the purchaser to elect to pay the non-residential rate of SDLT. For a company or an individual with additional properties this will shelter them from the higher rate of SDLT and could reduce their SDLT payment significantly. You will, however, need to carefully assess whether each of the dwellings will satisfy HMRC’s criteria and it can be far from straightforward.
Does the property have mixed use?
A property which is both residential and commercial could be classed as mixed use allowing the non-residential rate of SDLT to be paid however, this can be a hazardous area as highlighted in the recent case of Andrei Tretyakov v HMRC. The case made it clear that commercial use will not trump suitability for use as a dwelling and resulted in the Taxpayer having to pay an additional £484,250 in SDLT. This case has caused even more uncertainty when faced with a property which has both residential and commercial use and conveyancers need to be very wary of claims by purchasers that they should be paying the non-residential rate of SDLT.
It is sometimes possible to class a property as mixed use if there is land which does not form part of the garden and grounds of the residential property. This is also an area fraught with danger and there are a number of Tribunal decisions finding against the taxpayer. The fact a property has a paddock which a neighbour uses for his horse will be unlikely to pass the test for mixed use.
Non Residents
If any of the purchasers are not resident in the UK then a 2% surcharge will apply to the purchase of residential property. The purchaser is deemed resident providing they (or interestingly their spouse) has spent more than 183 days in the UK during the 12 months immediately preceding a transaction.
It will not always be easy to assess the correct rate of SDLT and if HMRC take a contrary view your client will not only be faced with an additional SDLT payment but will also be charged interest and could face penalties which can be as high as 100% of the underpaid tax.
Relatus Ltd are specialists in this niche area of taxation. We work with conveyancers and purchasers to ensure that the correct amount of SDLT is paid. Seeking our advice can protect the taxpayer from penalties and minimise the tax paid. For the conveyancer, seeking expert advice will protect them from a potential negligence claim should there be any penalties, interest and over/underpayment of tax.
If you have any SDLT questions contact Relatus today.
