Beware boutiques bearing gifts: property, stamp duty and treading with care
If you’ve made a property purchase, you may then have been contacted by a specialist (or ‘boutique’) tax firm, claiming you could have saved thousands of pounds in stamp duty land tax on the purchase. Every so often this happens to our clients, who ask us, “Is it a scam?”
Our answer: not necessarily.
The saving typically relates to a failure to claim Multiple Dwellings Relief (MDR). MDR applies where a purchaser acquires more than one dwelling from the same vendor. Purchasers often forget that the relief can apply where you buy a house which has a ‘granny flat’ or annexe, or a separate cottage in the grounds.
Even better, where the property is being acquired to use as a replacement main home, HMRC accepts that the additional 3% SDLT rates don’t apply. You can learn more in our earlier article on the SDLT second home surcharge.
While the call may not be a scam, you should still take care before proceeding. A couple of recent tax cases illustrate why.
Grounds for confusion
The first case concerned the purchase of a new home. The estate agent’s brochure described the property as a country home ‘surrounded by its own stunning gardens which extend to over 3.5 acres’. It went on to describe both the stunning formal garden and the land beyond, of which it said, ‘The grounds have been left to grow as a wild meadow’.
The buyer was advised by a specialist tax firm that this was a mixed purchase of residential and non-residential property, which meant that the much lower non-residential SDLT rates applied. The firm said the wild meadow part of the land, and also a dilapidated barn that stood on the land, were not part of the house and garden, and moreover were separated by hedges from the house and garden.
‘Residential property’ is defined as a building suitable for use as a dwelling and land that forms part of the garden or grounds of that building. The First-tier Tribunal judge said that ‘grounds’ has its usual wide meaning, which is more extensive than ‘garden’. It didn’t matter that these grounds were separated from the formal garden by hedges. The judge concluded that the wild meadow and the barn were part of the grounds of the dwelling.
Although this case is unhelpful on SDLT, it is helpful for sellers looking to claim capital gains main home exemption. For this to apply, garden or grounds of more than 0.5 hectares have to be required for the reasonable enjoyment of the house, bearing in mind its size and character. But it does show that the courts will take a wide view of what grounds means.
Analysing an annuity
The second case concerned the purchase of a property. The purchaser persuaded the sellers to enter into a complex arrangement whereby the property was acquired in exchange for an annuity.
According to the special SDLT rules relating to annuities, only the first 12 years’ payments are taken into account. This annuity was £383.84 for 125 years, meaning a total consideration of £4,606!
The sellers had the right to cash in the annuity with the purchasers. Needless to say, they did this: on the date of completion, £765,000 cash passed from the purchasers to the sellers and the title of the property passed to the purchasers. A bit like a standard property transaction!
The Tribunal judge analysed the legal arrangements very carefully. These included a clause that the sellers held the annuity “on trust” for the purchasers until completion. He concluded that the annuity was not the true consideration that triggered the transfer of the title to the purchasers: that only happened once the purchasers had paid the £765,000. So again the taxpayer lost!
HMRC also said that the purchaser had not made proper disclosure in the SDLT return of the £765,000. As a result, HMRC wanted a penalty of some £17,000 (in addition to the SDLT of around £30,000 and interest on late paid tax).
It turns out that this purchaser was a consultant from the same specialist firm that advised in the first case, described by the judge as “experienced in developing and advising on SDLT planning”! In order words, the purchaser knew what he was doing and HMRC’s penalty was allowed to stand.
So, a double warning to tread with care. As property tax specialists, we wouldn’t touch the annuity planning. But MDR and mixed property rates are legitimate reliefs which in the right circumstances can apply.
If you’d like to find out more, we’d be pleased to advise you. Please get in touch with us using our enquiry form.