Judith Pederzolli – Director of Business Tax and SDLT, PEM, Cambridge
There have been significant changes to both the SDLT legislation and HMRC’s approach to the application of the rules. This can often leave both conveyancers and taxpayers uncertain as to how a transaction should be treated for SDLT purposes.
Common questions include whether the residential or non-residential rates should apply and whether multiple dwellings relief is available. From 1 April 2021, the introduction of the 2% surcharge for the purchase of dwellings by non-residents is likely to cause more confusion. These areas are considered in more detail below.
Mixed use
The great disparity between the residential and non-residential rates means some purchasers are looking to claim that their property is “mixed use”. However, given the current SDLT holiday, mixed use is not always beneficial so this is worth checking. Traditionally large areas of land were thought to be more than areas “subsisting for the benefit of the dwelling” and so mixed use rates could be claimed. However, HMRC have hardened their position on this and often state that in the absence of an identifiable commercial use, all land sold with a dwelling will be treated as residential. Therefore you would need to look for evidence of commercial use, such as formal grazing licences or agricultural tenancies, which would prevent the seller being able to enjoy the land.
Multiple Dwellings Relief (MDR)
MDR is available where more than one dwelling is purchased in a single or linked transactions. The SDLT is calculated on the average price of each dwelling, then multiplied by the number of dwellings, thus giving access to the lower rate bands for each dwelling, although the minimum charge is 1% of the purchase price. In recent years there has been a surge in retrospective MDR claims, asking for refunds of SDLT, causing HMRC to enquire into many claims to ensure that the relief is genuinely available. In some cases it can be difficult to pin down whether a purchase consists of more than one dwelling and each case needs to be examined on its own facts. Buying several dwellings in one transaction can also affect whether the 3% surcharge for additional dwellings will apply.
Non-resident 2% surcharge
This has been under discussion since a consultation was released in February 2019 and the draft legislation was finally released on 21 July 2020. This surcharge will apply if any of the purchasers are non-resident (although there are special rules for spouses buying together). An individual is treated as UK resident if they are in the UK for at least 183 days during the period of 364 days before and 365 days after the completion of the purchase. Conveyancers will need to explain the rules to their clients to enable them to confirm their position. An individual may be non-resident at completion but then become resident at some point in the year afterwards. This means they need to pay the surcharge but can later claim a refund. Purchasers should be made aware of this and the time limits for making the claim, being 2 years after the original transaction date. HMRC are expected to release further guidance on the surcharge in due course.
The residency rules for companies are complex and it may be difficult in many cases to establish the company residency where the buyer is a UK company with some non-resident shareholders.
As well as the above, there are other matters to consider, such as whether (for companies) the 15% flat rate of SDLT for purchases of high value dwellings should apply, whether the transaction falls within the special partnership rules or whether the purchase is being made by a connected company and so may be deemed to occur at market value. In addition, where student accommodation is being purchased there may be an opportunity to avoid paying the 3% surcharge for additional dwellings. Without careful consideration it is possible that the wrong amount of SDLT could be paid, an opportunity to make a saving could be missed or the client is not warned of actions which could increase their SDLT bill.
As SDLT is now more complex than ever it is important that purchasers seek advice to ensure they pay the correct amount of SDLT and claim any reliefs they may be entitled to. Please contact Judith Pederzolli (jpederzolli@pem.co.uk) or Sarah Davis (sdavis@pem.co.uk) at PEM ( www.pem.co.uk ) for more details.
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