Spotlight on Stamp Duty

FEATURE

Spotlight on Stamp Duty

The SDLT holiday generated by the Stamp Duty Land Tax (Temporary Relief) Act 2020 has been a double-edged sword. No doubt it has boosted the property market when the economy generally has been in COVID hibernation. At the same time, it has created an artificial time limit which has increased the pressure on residential Conveyancers when pressure already existed with working from home, problems with search suppliers being able to meet the demand, and the almost constant drumbeat of pressure and criticism from estate agents.

Research reveals that there were approximately 100,000 transactions which were at risk of not completing within the allotted time due to the bottleneck in the conveyancing market. It is estimated that the temporary nil rate band has cost the Treasury £3.2 billion.

The original deadline of the 31st March 2021 has of course been extended to the 30th June 2021 courtesy of the Budget 3rd March 2021.

Whilst in some quarters the extension is welcome there are a number of criticisms that have been levelled at the Chancellor of the Exchequer including –

■ Replacing one deadline with another whilst appreciating that until or if COVID restrictions are lifted the current bottleneck might continue.

■ A failure to engage with some radical reform of the SDLT regime or even more radically replacing it with a totally new scheme. Ideas include a permanent reduction in SDLT, an exemption for downsizers to stimulate the retirement market and at the same time releasing housing stock into the marketplace.

■ The current SDLT regime does little to stimulate the first-time buyer market as first time buyer relief has historically been ineffective in increasing first time buyer numbers entering the market (see HMRC Evaluating the Impact of SDLT First Time Buyers Relief, HMRC Working Paper 13 (November 2011).

■ The SDLT holiday has distorted property values.

■ More radically SDLT has been criticised as a transaction tax when one of the basic tenets of taxation economics is that transaction taxes should be avoided and that SDLT discourages mutually beneficial transactions. The counter to this is the use of a sales transaction tax shifting the burden from the buyer to the seller as the latter is usually in a better position to pay the tax.

The Current Regime

Introduced in 2014 stamp duty has become a progressive tax with rate increases applied between specific stamp duty thresholds instead of being applied to the final purchase price of a property.

Changes were made to the new stamp duty system in November 2017 when the government introduced first time buyer relief and of course a number of surcharges have been introduced including higher rate surcharges relevant to second properties, and for non-UK residents. Do not forget the availability for multiple dwelling relief if buying 6 or more properties with a buyer able to choose non-residential rates of SDLT (not the higher rates) or higher rates using multiple dwellings relief.

The freehold residential stamp duty rates in England and Northern Ireland are shown in the tables below.

The SDLT rates until 30th June 2021 are –

Tax Band Normal Rate Additional Propertyless than £500k 0% 3%*£500k to £925k 5% 8%£925k to £1.5m 10% 13%rest over £1.5m 12% 15%

*An additional property purchased for less than £40k will attract 0% tax. For purchases from £40k to £500k the SDLT rate will be 3% on full purchase price.

The SDLT rates from 1st July to 30th September 2021 –

Tax Band Normal Rate Additional Propertyless than £250k 0% 3%*£250k to £925k 5% 8%£925k to £1.5m 10% 13%rest over £1.5m 12% 15%

*An additional property purchased for less than £40k will attract 0% tax. For purchases from £40k to £250k the SDLT rate will be 3% on full purchase price.

SDLT rates from 1st October 2021 where thresholds reflect rates before the stamp duty holiday.

Tax Band Normal Rate Additional Propertyless than £125k 0% 3%*£125k to £250k 2% 5%£250k to £925k 5% 8%£925k to £1.5m 10% 13%rest over £1.5m 12% 15%

*Where an additional property is purchased for less than £40k it will attract 0% tax. For purchases from £40k to £125k the SDLT rate will be 3% on full purchase price.

The SDLT holiday means the zero-rate threshold for standard purchases remains £500,000 meaning the majority of transactions will not attract any SDLT as long as completion is before 1st July 2021.

Advising Clients

1. Set realistic expectations so clients are aware of the problems currently being encountered due to COVID and the risk that completion cannot be guaranteed to take place before the 30th June 2021 or any other cut off dates.

2. Be cautious when dealing with transactions which involve an apportionment taking a property value below the £500,000 threshold. Is there independent evidence to confirm the value apportioned?

3. The client needs to be made aware of the seriousness of not transmitting all relevant information to HMRC when the SDLT Return is submitted.

4. The client needs to be made aware of the need for submission of the Return and the payment of SDLT within time to avoid interest and penalties.

5. Ensure when submitting SDLT Returns that the client understands the significance of information provided in the Return and the dangers in circumstances where the information is incorrect.

6. Be careful about advice that is given. The Conveyancing Quality Standards were published in February 2019 taking effect on 1 May 2019. The very first section is devoted to risk management and, after requiring some basic risk management tools, the first specific requirement relates to SDLT, even before AML procedures. The point is that SDLT compliance has become critical.

7. Ensure that you have confirmation in writing to confirm the client is a first-time buyer, is not an international buyer and that any apportionment is appropriate and justifiable.

The CQS provides: a. How to audit trail the SDLT calculation and advice; b. How and when to make checks between the consideration stated in the sale contract and transfer deed and SDLT Return and the payments on the solicitors’ client account ledger for the transaction; c. A procedure for verifying the amount of SDLT payable, where applicable.

The CQS General Guidance Notes provides:

a. Practices must ensure they have a policy on how to audit trail the SDLT information given by the client, the calculation of the SDLT due and the advice to the client;

b. Practices must ensure there is a verification procedure for the amount of SDLT payable. Where possible, this should include another experienced individual, other than the fee earner, and the verification should be recorded on the file;

c. Where the calculation is outsourced Requirement 1.2.c. might not be applicable. Sole practitioners and smaller practices should consider what procedure they could put in place if no other experienced individual is available, this could simply involve checking the SDLT payment again at a later date;

d. A number of firms ensure the SDLT computation checked by a ‘second pair of eyes’ within the firm.

8. The Government has recognised that as a result of the restrictions placed on the housing market, some people have been unable to sell a previous main residence within the three-year window allowed in order to qualify for a refund of the three per cent higher rates of SDLT. In most cases, the existing three-year window provides sufficient time for a previous residence to be sold and the three-year window for most taxpayers will not be changing.

An extension to the three-year window can now be granted by HMRC once a property is sold if an affected taxpayer was not able to make a sale within the three-year window due to exceptional circumstances outside their control. Affected taxpayers must make a sale as soon as practicable once the exceptional impediment to sale ceases to apply, and this amendment only applies to those whose refund window ended on or after 1st January 2020.

Taxpayers or their advisors can write to HMRC setting out their individual circumstances concerning the sale of the relevant property and HMRC will make decisions to grant an extension on a case-by-case basis. HMRC will also closely monitor the number and type of applications for an extension, as a protection against cases of fraud and abuse.

Schedule 4ZA FA 2003 makes provisions to charge the higher rates of SDLT. The 3-year time limit is at paragraph 3(7)(b) of Schedule 4ZA. By virtue of paragraph 8 of Schedule 4ZA, a purchaser can claim a repayment of the higher rates for additional dwellings provided they sell their previous main residence within 3 years of buying their new main residence.

Legislation introduced in the Finance Bill 2020 allows a repayment of higher rates for additional dwellings where HMRC is satisfied that:

■ There were exceptional circumstances that prevented the person from selling the previous main residence within the 3-year period, and

■ The person sold the residence as soon as practically possible and has made an application within 12 months of the disposal of the previous main residence.

This measure came into effect in 2020 and will apply to SDLT paid on purchases with an effective date on or after 1st January 2017. The disposal of the previous main residence must have taken place on or after 1 January 2020. This measure will only apply to individuals with properties situated in England and Northern Ireland as SDLT is devolved to Wales and Scotland.

HMRC has also published an explanatory note on the new clause which discusses the circumstances in which this extension would be granted:

In the vast majority of cases 3 years is ample time, taking account of the sorts of events that ordinarily might delay matters, in which to complete the sale of the previous main residence and receive a refund. As the COVID situation reveals there will be circumstances (not limited to COVID) in which individuals are prevented by some exceptional impediment to completing the sale of the previous main residence within the 3-year deadline.

If this situation applies, HMRC will be able to grant a refund if the previous residence is sold as soon as is reasonably practical when the exceptional circumstances ceased to apply and where they are satisfied that the exceptional circumstance was the reason that prevented the sale.

Exceptional circumstances would include prevention of the sale as a result of a restriction imposed by a public authority (e.g., the government restrictions placed on the housing market as a result of the COVID-19 pandemic).

Exceptional circumstances do not include, for example:

■ Fluctuations in the housing market which deter owners from selling within the 3-year time limit at market values applying at that time, or

■ The ordinary and ‘everyday’ events that occur in the buying and selling of property, such as prospective purchasers changing their mind and dropping out of the transaction.

The new Clause 24 allows a refund of the additional 3% higher rate of stamp duty where exceptional circumstances prevented the sale of the previous main residence in the three-year window within which a sale must ordinarily take place. The new clause applies to those whose refund window ended on or after 1st January 2020. It is to ensure that responsible actions taken by people do not lead to negative tax implications and that those who would otherwise have received a stamp duty land tax refund are still able to receive it, despite the COVID pandemic.

A word of caution

In 2012 the Finance Act included a long schedule 38: Tax agents – dishonest conduct. An agent is somebody who, in the course of business, assists others (“clients”) with their tax affairs.

This will include completing a land transaction return or calculating SDLT. Even if those tasks are outsourced it does not exempt the Conveyancer from responsibility, for:

■ Assistance with a client’s tax affairs also includes assistance with any document that is likely to be relied on by HMRC to determine a client’s tax position.

■ Assistance given for non-tax purposes counts as assistance with a client’s tax affairs if it is given in the knowledge that it will be, or is likely to be, used by a client in connection with the client’s tax affairs.

SDLT is a tax on land transactions and Conveyancers have the role of documenting the land transaction. As tax agents, Conveyancers could face a personal penalty (of between £5,000 and £50,000) that is not likely to be covered by a PI policy if, in the course of acting as a tax agent, we “do something dishonest with a view to bringing about a loss of tax revenue” whether or not a loss is brought about and whether or not we are acting on the client’s instructions.

For these purposes “Doing something dishonest” includes:

a. Dishonestly omitting to do something;

b. Advising or assisting the client to do something we know to be dishonest;

c. The compliance handbook at CH181140 describes dishonesty as “not honest, trustworthy or sincere” by reference to the standards of reasonable people or “reasonable practitioners”.

A cautionary example is worth exploring where a client or tax adviser asked us to restructure a transaction in order to save SDLT and that involved a decision the Conveyancer would not normally take without really understanding why. That might be seen as dishonest conduct.

The considered view seems to be that HMRC will penalise tax agents rarely, but the warning is that there might be a financial penalty, and being reported to the SRA.

About the author

Ian Quayle qualified as a solicitor and worked in private practice undertaking a variety of conveyancing work for many years before delivering training courses for the main UK training providers. He is now the Chief Executive of IQ Legal Training a training company delivering bespoke learning opportunities, courses, and webinars to the legal profession.

Ian Quayle

Ian is presenting a free webinar for SLS Members on ‘Residential SDLT: An Essential Update’ at 11am on 22nd April 2021. To book your place, please visit www.surreylawsociety.org.uk/courses. ■