Property buyers beware of possible increase in costs and complexity, warns ATT
The Association of Taxation Technicians (ATT) is supportive of HMRC’s plan to crack down on stamp duty land tax (SDLT) tax avoidance when people buy residential property. But the ATT is concerned that HMRC’s proposals to tackle one aspect of the problem will add uncertainty for the purchaser about final purchase cost, complexity that affects both sellers and buyers and could delay the buying process - as well as resulting in increased SDLT bills.
At present purchases of mixed-property are wholly charged to the non-residential rates of SDLT, which are lower than the residential rates (even where only a small proportion of the property is non-residential in nature). This gives individuals purchasing residential property a strong incentive to argue that part of the property such as a field or large garden are in fact non-residential. HMRC have successfully challenged a number of claims of this nature in court. To counter further tax abuse, HMRC are suggesting apportioning the tax for a mixed-use property: meaning residential rates of SDLT paid on residential land, and non-residential rates of SDLT paid on non-residential land.
Jon Stride, Co-Chair of ATT’s Technical Steering Group, said:
“We agree that the proposal will target the particular abuse that HMRC are concerned about, but buyers of mixed-use property should prepare themselves for additional costs and complexity. The proposal will have a wider effect on businesses in particular, and not just individual residential transactions where the majority of abuse is occurring. For example, the plans for apportionment may result in unfairness where the residential element is small, but the overall transaction figure is large, because the rates of residential property are so much greater once the total proceeds exceed £925,000.”
In its response to a HMRC consultation,1 the ATT warns that this move will present problems.
Jon Stride said:
“Apportionment is likely to increase SDLT on the residential elements of a mixed-property because residential SDLT rates are higher, and there is increased likelihood of higher rates of tax for additional dwellings (HRAD).2 This will increase costs for some businesses including purchasers of pubs, shops with flats, or farms where the purchase includes a farmhouse or cottages.
“The process of establishing the necessary value is likely to increase costs and complexity. Where tax depends on the apportionment, the increased uncertainty over the SDLT figure at the start of the process may affect buyers if the final apportionment results in a charge significantly greater than that budgeted for. Given that valuation is an art as much as a science, should HMRC enquire into an apportionment and take a different view, there is a risk of additional SDLT and penalties because of disagreements over valuation.”
The ATT warns of increased complexity for conveyancers. This may increase the need for a property tax professional to be involved now and introduce delays because of the need to obtain valuations. There is also the likely impact on the mortgage application process if the SDLT figure is larger than expected and additional finance is required.
HMRC are also consulting on reform to Multiple Dwelling Relief (MDR). MDR reduces the rate of SDLT on a purchase of multiple residential properties so that it is closer to that charged when purchasing those properties singly. The policy was originally intended to strengthen demand for, and reduce barriers to, investment in residential property. HMRC are concerned about abusive claims by private individuals seeking to argue that there is a secondary dwelling within their main residence, to bring themselves within scope of MDR and pay less tax.
HMRC suggest a number of solutions. ATT is supportive of an option whereby part of a building, or a building within the grounds of another dwelling, would not count as a separate dwelling for the purposes of MDR unless its value is a third or more of the total price attributable to the property as a whole. While the current definition of a ‘dwelling’ includes part of a building that is suitable for use as a single dwelling, the addition of ‘a one third of the value’ test is expected to be sufficiently high to stop most of the incorrect claims of MDR.
Jon Stride said:
“Of the options provided, treating a modest ‘granny annexe’ or similar as part of the main house, rather than a separate dwelling for MDR is the most logical, as it is consistent with the point at which the annexe becomes large enough that the higher rates for additional dwellings will apply. However, in the consultation the Government has questioned whether some groups such as disabled individuals looking for separate accommodation for carers or those looking to care for older relatives in a ‘granny annexe’ who genuinely need a property which includes a subsidiary dwelling might be disadvantaged by this move. This is a difficult area for us to comment as subsidiary dwellings can also be used for profit as rental or holiday lets. Given these concerns, the Government may want to consider some specific policy for specific vulnerable groups who would benefit from owning property with a subsidiary dwelling.
“In general it is unacceptable for Multiple Dwelling Relief (MDR) to be claimed where there is no genuine annexe. While we can understand the desire to provide for a more robust defence to this approach, in the longer term we think it would be beneficial for the Government to review MDR as a whole to determine if it is achieving its intended policy goal.”
Notes for editors
- The Association of Taxation Technicians has responded to HMRC's consultation on 'Stamp Duty Land Tax: mixed-property purchases and Multiple Dwellings Relief'. Link.
- Higher rates for additional dwellings were introduced in April 2016 as schedule 4ZA to the Finance Act 2003. As a rule, higher rates for additional dwellings require individuals who buy residential property while already owning such property to pay stamp duty land tax at rates three percentage points above the standard rates.
- 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 non-residential. 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.