Risks in HMRC stamp down on stamp duty land tax abuse

Mixed-use property purchases range from a country house with some land let for grazing, to fast food shops with flats above, pubs and B&Bs, through to large scale city centre developments comprising ground floor retail outlets with flats above. HMRC fear that the tax rules for such mixed-use property transactions are used by some purchasers to unfairly reduce SDLT payable, despite the purchase not containing any meaningful commercial element. This is because purchases of mixed-use property are currently wholly charged to the non-residential rates of SDLT, which are much lower than the residential rates (even where only a small proportion of the property is non-residential in nature).

In an early-stage consultation, HMRC suggest that it is more equitable and would reduce opportunities for unmerited claims if they require purchasers to apportion the property: meaning residential rates of SDLT would be paid on the part of the purchase price apportioned to residential land, and non-residential rates paid on the part of the purchase price apportioned to non-residential land.

Commenting on HMRC’s proposal, Marc Selby, Chair of CIOT’s Property Taxes Committee, said:

“This proposal is a workable solution to stop people classifying their transactions as mixed-use when what they are buying is really a residential property, but it has significant drawbacks.

“Apportionment will add more stages into a calculation that is already a complicated area of tax law, especially for conveyancers, most of whom are not tax experts. The need for a valuation would extend to more transactions than currently required, potentially adding costs and compliance risk given the inherent uncertainty in valuation and extending the time for completing purchases. The home buying and selling process is already potentially expensive, time consuming and stressful.

“HMRC’s plan will remove unfairness in the system because currently a country estate could pay a lower rate of SDLT, just because it has some small commercial element, than a three-bedroom semi-detached property in London. But the problem is that HMRC’s proposed method of apportionment brings in other types of unfairness resulting in a disproportionately high SDLT cost for a relatively low value residential property bought with commercial property, say a valuable farm with a modest house or an office block with a caretaker’s flat."

Commenting further on HMRC’s proposal Marc Selby added:

“Introducing apportionment could generally lead to a higher rate of SDLT on mixed-use transactions than is paid currently. Recent HMRC research points out that increasing SDLT on purchases of commercial property can lead to a decrease in transactions.

“The CIOT suggests this unfairness could be overcome by an alternative apportionment method that taxes the residential element at rates appropriate to the consideration for the residential element only."²

Multiple dwellings relief reform

HMRC are also consulting on ways to tackle abuse of multiple dwellings relief (MDR).

MDR reduces the SDLT payable per property so it is closer to the amount payable on the purchase of a single residential property. But analysis by HMRC of a sample of amended returns with MDR claims showed that up to 40 per cent of those claims may not qualify for the relief. Many of these claims are from the emergence of an industry of ‘SDLT reclaim agents’³ who contact purchasers after they have submitted their SDLT return, suggesting often incorrectly that part of the property purchased is a separate dwelling (e.g. claiming a utility room or a pool room is a separate dwelling). HMRC have a strong record of successfully challenging incorrect MDR claims through litigation but this is highly resource intensive, so they are consulting on legislative options to reduce or eliminate the scope for incorrect claims and abuse of the rules.

Marc Selby said:

“We understand the need to counter claims being made by firms offering help with SDLT refunds which turn out too good to be true for property buyers.

“The unreasonable claims seen by HMRC are confined to non-business purchases. This suggests one of HMRC’s options of changing the rules such that a separate area of a main dwelling does not count as another dwelling unless its value is a third or more of the total price could meet the Government’s objective without the need to change the rules for business purchases.

“We would welcome an evaluation of the efficacy of MDR overall as part of the consultation process on any proposed changes.”

Notes for editors

1. CIOT’s submission to HMRC is here.

Under the Government’s proposals, the buyer would first need to establish the percentage split between residential and non-residential elements. Then the SDLT would be calculated as if the whole proceeds were for a residential property, and then again if whole proceeds were for non-residential property. These two figures are then scaled to their respective proportions of the whole property and added together. For a property which was say, 20 per cent residential and 80 per cent non-residential, the total bill would be based as 20 per cent of the amount if the whole proceeds were assessed to residential rates plus 80 per cent of the amount if the whole proceeds were assessed to non-residential rates.

The change will impact significantly on taxpayers, tax practitioners and conveyancers, those involved in the construction, marketing and sale of property, property rental businesses, including buy-to-let landlords and even non-governmental organisations with an interest in tax.

2. A significant drawback in HMRC’s approach, in CIOT’s view, is it gives an incongruous result where the residential property is of relatively low value compared to the value of the mixed-use property overall because the price apportioned to the dwelling element is set by the overall price for the whole property. Hence, a high rates of up to 17 per cent could be charged for a modest dwelling purchased with non-residential property.

CIOT’s suggested alternative is for the non-residential part to be charged at rates applicable to the overall price (as with HMRC’s method) but the dwellings are charged at rates applicable to the price of the dwelling only (there is precedent for this in the existing SDLT rules and HMRC guidance).

3. CIOT: Stamp duty refunds: too good to be true? 20 August 2021

Examples of unreasonable claims that HMRC have seen include the following:

• A purchaser submitted a return following the purchase of a large house, but later claimed that an indoor entertainment area, swimming pool and toilet at the end of the garden were a separate dwelling.
• A purchaser bought a typical suburban house and the conveyancer correctly submitted the SDLT return on the basis that it was a single dwelling. Later the purchaser claimed that the integral garage which had a toilet and basin was itself capable of being used as a dwelling and so the purchase qualified for MDR.
• A purchaser claimed that an en-suite bedroom in a seven-bedroom detached house was suitable for use as a separate dwelling as it had a built-in wardrobe with an electric socket and could house a microwave and a kettle and so function as a kitchen.
• A purchaser bought a two-bedroom barn conversion and later claimed that a utility room with a toilet was suitable for use as a separate dwelling. They amended their return to claim MDR on the basis that the barn conversion was two separate dwellings. More here (p.17).