Common Misunderstandings and Errors in SDLT

(Inaccurate SDLT Assessments)

Scenario: Assisted sale.

(Inaccurate SDLT Assessments>Common Misunderstandings and Errors in SDLT)

➤ In assisted sales, homeowners must pay a 3% SDLT surcharge on a new home if their original home hasn’t technically sold yet, despite an exchange of contracts with a developer for renovations.

Explanation of assisted sale
Broadly speaking, the term “Assisted Sales” refers to a property selling technique whereby a homeowner can sell their house directly to a specialist company or an investor at a pre-agreed price. The buyer completes all necessary improvements within the specified period, subsequently selling the property and settling the remaining agreed-upon sum with the seller.

Example: A developer agrees to buy a homeowner’s property, listed at £450,000 but unsold for a year due to subsidence issues making it unmortgageable, for £400,000. The developer pays a 10% deposit and starts repairing the subsidence and renovating the property. 

After the improvements, the property is sold for £550,000, as it now qualifies for a mortgage. The developer and the homeowner share the £150,000 profit. The developer completes the purchase on the same day the new buyer exchanges, paying standard residential Stamp Duty plus a 3% surcharge on the £400,000 purchase price. The additional value of £150,000 created by the developer is not subject to further Stamp Duty, as the sale price at completion was set at £400,000.

Scenario: 3% SDLT surcharge paid by homeowner

A property developer undertakes an assisted sale agreement with a homeowner, where the developer exchanges contracts to commence renovation works on the home. Concurrently, the homeowner buys a new residence, assuming they’ve effectively sold their original property due to the contract exchange.

Incorrect Assessment

The homeowner assumes that the exchange of contracts marks the sale’s completion, as they have read HMRC guidance stating: “When to pay. [SDLT] Payments are due within 14 days of the ‘effective’ transaction date. This is usually the date the transaction is completed, but it can also be the date: the purchaser is entitled to take possession of the property”. This leads them to believe they are exempt from the 3% higher rate Stamp Duty Land Tax (SDLT) surcharge on their new purchase because the property developer possesses the property, and thus they presume they no longer own an additional property.

Correct Assessment

Despite the exchange of contracts, the sale of the original property has not technically completed, meaning the homeowner still owns an extra property. Consequently, they are liable for the higher rate SDLT surcharge on their new home. However, there is an opportunity for the homeowner to reclaim this surcharge if the sale of their former property finalises within three years, effectively reducing their overall SDLT liability.

Conclusion

Although it’s relatively rare, this scenario highlights the importance of understanding the implications of property ownership on SDLT obligations. Homeowners engaged in assisted sale transactions must recognise the potential for a 3% SDLT surcharge on subsequent property purchases. 

Scenario: Mixed-Use Property Misclassification

(Inaccurate SDLT Assessments>Common Misunderstandings and Errors in SDLT)

➤ A developer buying a mixed-use building saves on SDLT by correctly classifying it as non-residential, reducing the tax from an incorrect £51,500 to the correct £29,500.

A property developer buys a building for £800,000, where the ground floor is a commercial space valued at £50,000, operating as a “coffee shack” with no seating. The residential portions on the two upper floors are valued at £375,000 each. The developer intends to convert the building into entirely residential units for resale.

Incorrect Assessment

The buyer classifies the building as residential for Stamp Duty Land Tax (SDLT) purposes, considering that 85% of the building’s floor area is used for residential purposes and the future intent is as residential.

Correct Assessment

Regardless of the commercial part’s floor area, it serves a commercial function. According to HMRC, ‘A ‘mixed’ property is one that has both residential and non-residential elements, for example a flat connected to a shop, doctor’s surgery or office.’ Thus, the property should be assessed as non-residential for SDLT purposes.

Incorrect Calculation (Assumed as Residential with Surcharge):

• Residential rates on £800,000 with an additional 3% surcharge:
  • £250,000 at 0% = £0
  • £550,000 at 5% = £27,500
  • 3% surcharge on the total £800,000 = £24,000
  • Total SDLT (Incorrect) = £27,500 + £24,000 = £51,500

Correct Calculation (All Non-Residential Rates):

• Non-residential rates on £800,000:
  • £150,000 at 0% = £0
  • £100,000 at 2% = £2,000
  • £550,000 at 5% = £27,500
  • Total SDLT (Correct) = £2,000 + £27,500 = £29,500

Conclusion

By accurately identifying the building as non-residential at the time of purchase, the developer’s total SDLT liability is £29,500, which is substantially lower than the £51,500 SDLT that would have resulted from an incorrect assessment.

Scenario: Deferred payments subject to planning permission
(Inaccurate SDLT Assessments>Common Misunderstandings and Errors in SDLT)

➤ A property developer correctly including a £400,000 deferred payment for future planning permissions in SDLT calculations increases the tax from £51,000 to £71,000.

A property developer acquires a piece of farmland for £1.2 million with an agreement to pay an additional £400,000 if further planning permissions are granted. The land is purchased as non-residential for Stamp Duty Land Tax (SDLT) purposes, given its history as farmland and the absence of any prior residential development.

Incorrect Assessment:

The property investor initially pays SDLT on the £1.2 million purchase price alone.

Correct Assessment:

The agreement includes a deferred payment clause, where the developer commits to paying an additional £400,000 contingent upon the granting of further planning permissions. This scenario falls under HMRC’s definition of “contingent consideration,” where SDLT liability may include amounts that are contingent on future events.

Incorrect Calculation:

• On £1.2 million at non-residential rates:
  • £150,000 at 0% = £0
  • £50,000 at 2% = £1,000
  • £1,000,000 at 5% = £50,000
  • Total SDLT (Incorrectly Assessed) = £51,000

Correct Calculation:

• Initial payment on £1.2 million as calculated above = £51,000
• If the contingent event occurs (planning permission granted), the additional £400,000 becomes payable:
  • £400,000 at 5% = £20,000
• Total SDLT (Correctly Assessed) = £51,000 (initial payment) + £20,000 (contingent consideration) = £71,000

Conclusion:

The correct assessment of SDLT should account for both the initial purchase price and the contingent consideration, aligning with HMRC’s guidelines on deferred payments. Initially, SDLT is calculated on the £1.2 million purchase price, but with the potential for an additional £400,000 contingent on future planning permissions, the SDLT liability could increase, reflecting a total correct SDLT of £71,000 after the contingent event.

Scenario: Leasehold Interest Challenges

(Inaccurate SDLT Assessments>Common Misunderstandings and Errors in SDLT)

➤ Correctly assessing SDLT for lease variations depends on the specific changes made, not on the original lease terms, and can lead to additional charges or no refund for rent reductions.

Scenario 1: A Property Developer Extends the Lease Term

• Misconception: A property developer decides to extend the lease term of a commercial property they own. Believing any lease variation automatically incurs additional SDLT, they prepare to pay SDLT on the entire value of the property again.
• Incorrect Assessment for SDLT: Calculating SDLT on the total value of the property as if it were a new purchase.
• Correct SDLT Assessment: SDLT should be calculated based on the net present value (NPV) of the rent payable over the term of the lease after the variation, focusing only on the increase in term or rent due to the lease variation.

Scenario 2: A Landlord Increases Rent Mid-Lease

• Misconception: Midway through a lease, a landlord negotiates an increase in rent with the tenant and assumes that this increase does not affect SDLT because the lease hasn’t concluded.
• Incorrect Assessment for SDLT: Assuming no SDLT is due because the original lease agreement remains in effect.
• Correct SDLT Assessment: An increase in rent due to a lease variation can trigger additional SDLT if it increases the NPV of the lease payments above the SDLT threshold. The additional SDLT should be calculated based on the increase in rent over the remaining term of the lease.

Scenario 3: A Tenant Negotiates a Reduction in Rent

• Misconception: A tenant successfully negotiates a reduction in rent due to market downturns. They assume this will allow them to claim a refund on SDLT previously paid.
• Incorrect Assessment for SDLT: Expecting a refund of SDLT due to a reduction in rent.
• Correct SDLT Assessment: SDLT is not refundable in the event of a rent reduction. The tax is calculated at the time of the lease agreement or variation, and subsequent reductions in rent do not trigger a reassessment or refund.

Scenario 4: A Business Acquires Additional Rights Within Their Lease

• Misconception: A business acquires additional rights within their existing lease, such as the right to sublet a portion of the property. They assume this variation does not impact SDLT since it does not directly relate to rent or lease term.
• Incorrect Assessment for SDLT: Ignoring the potential SDLT implications of lease variations that do not directly alter rent or term.
• Correct SDLT Assessment: While not all lease variations result in additional SDLT, significant changes (chargeable variations) like acquiring substantial new rights may affect SDLT calculations. It’s essential to assess the specific terms of the variation to determine if additional SDLT is due.

Scenario 5: A Company Restructures Its Lease for a Longer Term

• Misconception: A company restructures its lease to extend the term and mistakenly believes that SDLT is calculated on the lease’s total extended term.
• Incorrect Assessment for SDLT: Applying SDLT to the whole duration of the extended lease as if it were a new agreement.
• Correct SDLT Assessment: The correct approach is to calculate SDLT on the difference in the NPV of the rent over the extended term, considering only the extension period, not the entire lease term.

In each of these scenarios, the key to correctly assessing SDLT lies in understanding the specifics

Scenario: Regional Rate Variations

(Inaccurate SDLT Assessments>Common Misunderstandings and Errors in SDLT)

➤ Investors must use the correct stamp duty rates based on the property’s location (SDLT for England and Northern Ireland, LBTT for Scotland, and LTT for Wales) to avoid financial errors and legal issues.

Reason for confusion: Investors may mistakenly believe that there is a set of standard stamp duty rates for all properties purchased in the UK. This misunderstanding can lead to incorrect financial planning and budgeting, as well as potential legal and tax implications.

Incorrect Assessment: Applying uniform Stamp Duty rates regardless of regional variations. For instance, investors might incorrectly assume that the same Stamp Duty Land Tax (SDLT) rates apply throughout the UK, without considering the differences in other regions. Specifically:

• Stamp Duty Land Tax (SDLT) applies to properties in England and Northern Ireland.
• Land and Buildings Transaction Tax (LBTT) applies to properties in Scotland.
• Land Transaction Tax (LTT) applies to properties in Wales.

Each of these taxes has its own set of rates and thresholds, reflecting regional economic conditions and policy decisions. For example, the rates and thresholds for SDLT in England and Northern Ireland differ significantly from those of LBTT in Scotland and LTT in Wales.

Correct Assessment: Using the correct Stamp Duty rates based on the property’s geographical location. Investors need to be aware of the specific stamp duty regime that applies to the region where the property is located.

Examples of Correct Assessment:

1. England and Northern Ireland: If an investor purchases a property here, they should apply the SDLT rates. The rates can vary based on the property value and whether it is a first home or an additional property.
2. Scotland: For properties in Scotland, the investor should use the LBTT rates. These rates and thresholds can be different from those in England and Northern Ireland.
3. Wales: For properties in Wales, the LTT rates apply. These are distinct from both SDLT and LBTT, reflecting the Welsh government’s tax policies.

Scenario: First-Time Buyer with Previous Property Share

(Inaccurate SDLT Assessments>Common Misunderstandings and Errors in SDLT)

➤ Owning a share in any property disqualifies someone from first-time buyer relief, resulting in higher SDLT costs for their first home purchase, not the lower rate they might expect.

Reason for Confusion: A person inherits money and invests in a small share of an investment property. Years later, when they decide to purchase their first home valued at £450,000, they are unaware that owning a share in an investment property disqualifies them from first-time buyer relief and subjects them to an additional 3% property surcharge.

Incorrect Assessment

Assumption: The buyer assumes they are eligible for first-time buyer relief and calculates SDLT without the additional 3% surcharge.

Example Calculation:

• Property value: £450,000
• Assumed SDLT calculation as a first-time buyer:
  • 0% on the first £425,000 = £0
  • 5% on the next £25,000 (£450,000 – £425,000) = £1,250
• Total SDLT assumed: £1,250

Correct Assessment

Reality: Since the buyer already owns a share in another property, they are not considered a first-time buyer and must pay the standard residential rates plus a 3% higher rate on the entire purchase price.

Example Calculation:

• Property value: £450,000
• SDLT without first-time buyer relief, including the additional 3%:
• Total SDLT with additional charge: £10,000 (standard SDLT) + £13,500 (additional charge) = £23,500

Conclusion

In this scenario, the misunderstanding about eligibility for first-time buyer relief and the additional property surcharge results in a significant difference in SDLT owed. The incorrect assessment underestimates the SDLT by assuming eligibility for relief, while the correct assessment recognises the impact of previous property ownership, leading to a much higher SDLT due.

Incorrect Application of 3% Surcharge to Property Purchase

(Inaccurate SDLT Assessments>Common Misunderstandings and Errors in SDLT)

➤ Abigail is exempt from the 3% SDLT surcharge on her new house purchase as she meets the conditions for replacing her main residence.

Scenario
Abigail has separated from her husband and is planning to buy a new house in West Sussex for £400,000 as her new main residence. Abigail sold her share in the former matrimonial home to her husband and is currently living in a flat she owned before marriage, which she plans to keep and rent out. Confused by HMRC’s guidance, she contacts HMRC to confirm whether the higher rates of SDLT would apply, given she is replacing her only or main residence.

Incorrect Assessment 

Abigail believes that the higher rates of SDLT for additional residential properties (the 3% surcharge) would apply to her purchase. They base their decision on the fact that she would retain ownership of the flat she plans to rent out, implying that she cannot be treated as replacing her main residence because she is retaining another property.

Correct Assessment

The correct assessment should consider the “replacement of only or main residence” exception under the SDLT rules. For this exception to apply, all the following conditions must be met:

1. Abigail intends to live in the new home as her only or main residence.
2. She disposed of her share in the former matrimonial home within the three years before or on the same date as the purchase of the new home.
3. Immediately after the disposal of the former home, she did not retain a major interest in it.
4. Abigail lived in the sold dwelling as her only or main residence at some time in the three years before the purchase of the new home.
5. Neither Abigail nor her spouse (from whom she is permanently separated) has acquired a major interest in any other dwelling with the intention of living in it as their only or main residence since the disposal of the sold dwelling.

Given Abigail meets all these conditions, including the fact that she is permanently separated from her husband, the “replacement of only or main residence” exception should apply. Therefore, the 3% surcharge does not apply to her transaction, and she should only be liable for the standard rate of SDLT on her purchase, not the higher rate. The misconception arose due to a misunderstanding of the rules and incorrect guidance provided by HMRC, emphasising the complexity of SDLT regulations and the importance of obtaining accurate advice.