Relaxation to rules on re-claiming Stamp Duty Land Tax – Good news for property owners

Author

Robert Wilson

As a Senior Tax Manager, Robert works across all levels of the business to aid and abet the delivery of tax advice across ETC’s broad and varied client base. He has a particular interest in the tax affairs of owner managed businesses and the personal affairs of the company shareholders, including profit extraction, exit planning and family wealth preservation.

Readers may well be aware that a rather draconian measure was introduced from 1 April 2016 whereby the purchase of a second residential property (in addition to one or more residential property(ies) already owned) with a value of £40,000 or more attracts an additional 3% surcharge to Stamp Duty Land Tax (“SDLT”) on top of the rate already applicable.

Clearly, this was one of a long line of George Osborne’s measures designed to penalise and ultimately dissuade taxpayers from becoming property tycoons. Depending on which side of centre your political allegiances may lie, this was either seen as a blessing or a curse i.e. another measure to prevent the Top Hat on the monopoly board from buying up Park Lane, or, a move comparable to Mr Osborne coming round to your house for dinner uninvited and staying for a fortnight.

Whatever you feel on the subject, a somewhat unfortunate fall out of the measure is applicable to those taxpayers who purchased a second property with the intention of this becoming their main residence prior to their being able to sell their existing home. With a somewhat unpredictable property market for what seems to have been a generation, it is quite common for taxpayers to find themselves in this position, however, they do not escape this extra surcharge.

There are circumstances which do allow for the ‘extra’ stamp duty to be reclaimed by the taxpayer. That process is subject to certain conditions, one of which has this month been relaxed. We’re not often on the receiving end of good news from HMRC in respect of tax on property, therefore this change was almost a ‘falling off seat’ moment for us and deserves an article all to itself.

Who can claim the relief?

Where a taxpayer sells their former main residence after buying their new home, then it is possible to claim an SDLT refund of the 3% surcharge where each of the following conditions are satisfied:

  • the buyer intends to live in the new home as the buyer’s only or main residence;
  • within the subsequent three years, the buyer (or their spouse or civil partner) sells or otherwise disposes of the old home;
  • at any time within the three years before the purchase of the new home, the buyer lived in the old property as their only or main residence.

What’s changed?

The words ‘three years’ above have been deliberately emboldened. From 3 June 2020, the three-year window has been relaxed due to the exceptional circumstances we are currently facing due to (largely) COVID-19.

This move will allow taxpayers to apply for a refund of the additional 3% SDLT surcharge even if their previous home was not sold within the three-year time limit where that period came to an end on or after 1 January 2020.

In effect therefore, if a taxpayer completed the purchase of a second residential property on 1 January 2017, they are now still within time to reclaim the additional 3% SDLT surcharge.

In typical HMRC fashion though, this relaxation to the rules is not as simple as that. A process does need to be followed: –

  1. The taxpayer must first sell their previous main residence; and
  2. The taxpayer must prove that they were ‘prevented by some exceptional circumstance beyond their control from disposing of their previous main residence within the three-year time limit’

Somewhat vague guidance determines ‘exceptional circumstance’ as being a question of fact and degree and each case will be considered on its own merits. Specifically, HMRC does provide an example within its revised guidance as being: –

  • [The taxpayer] being prevented from selling the property owing to government guidance during the Covid-19 pandemic; or
  • Other action taken by a public authority preventing the sale of the property.

HMRC then go one to say that ‘a mere change of intention of any party to the transaction at a late stage, a shortage of funds, or deciding not to sell the property in anticipation of making a loss (for example during a downturn in the market) will not be regarded as exceptional circumstances, rather they are the sorts of events that occur in the ordinary course of buying and selling property.’

Whilst therefore this relaxation may provide a breath of fresh air to some, it should not be taken as gospel that the relaxation to the time limits will definitely apply to you. There would appear to be a burden of proof placed on the taxpayer to evidence that the sole reason they could not sell their previous residence was due to the ‘exceptional circumstances’ outlined above. Taxpayers must also actually sell their previous residence.

It is important to note that in any event it is for the taxpayer to make a claim for relief to HMRC, not the other way around!

Interaction with Multiple Dwellings Relief

Following on from the above, readers may well be interested in our previous posts in relation to making a claim for multiple dwellings relief (“MDR”). For further information on MDR may be click here.

Self-contained annexes included in the purchase of a house were removed from the scope of the additional 3% SDLT surcharge provided certain conditions are satisfied (and provided the surcharge does not apply for other reasons, for example, the purchaser already owns another house).

The problem that can arise is that on the purchase of a new residential property containing a self-contained annex or ‘dwelling’, in order for the requirement to pay the 3% surcharge to be removed, there are conditions which must be met. Those are: –

  • The dwelling or annex must be within the grounds or in the same building as the primary residence; and
  • The value of the dwelling or annex on a standalone basis must be no more than 2/3rds of the whole purchase price. This is apportioned on a just and reasonable basis

Again, the guidance notes as to what constitutes ‘within the grounds’ and ‘on a just and reasonable basis’ are typically vague. We find that this has the following results: –

  1. Making a claim for MDR is simply disregarded due to the nervousness of the professional advisor in pinning their flag to the post and making an assessment on whether MDR can or should apply, thus resulting in their client paying more SDLT than they need to; or
  2. An overzealous professional advisor makes effort in making a claim for MDR within their client’s SDLT return, but doesn’t consider these extra considerations and therefore lands their client in a position where they actually end up suffering the extra 3% SDLT, even where the property purchase is a replacement of their previous main residence.

Much like we have discussed above, the burden is on the taxpayer to self-assess how much SDLT they should be paying where the property purchase contains an annex/dwelling. HMRC have, generally, 9 months from the submission of the SDLT return in which to question the matter, therefore any evidence in support of the claim should be retained.

However, a taxpayer has 12 months from the date of filing the SDLT return in which they may amend the position. This is particularly useful where there is a case to answer that SDLT has been mis-calculated due to the interaction between MDR and the 3% surcharge, or indeed simply mis-calculating the availability of MDR in its own right. In limited circumstances, the 12 months may be increased to 4 years.

How can ETC Tax help?

Whether you or your client finds themselves in a position of either purchasing, or having already purchased, a residential property on which there is a question mark over the rate of SDLT and subsequently how SDLT should be calculated, we can help you navigate through the vagueness of the legislation and guidance and provide you with a firm opinion on the subject.

In particular, one of the key messages of this article is that even if you have already paid SDLT on your property purchase, all is not lost, we can help to assess and determine if you can reclaim any overpayment from HMRC. As noted, the burden of proof for determining whether SDLT has been overpaid rests with you as the taxpayer, HMRC will not help you with this process, but we can.

If you or your client would like any assistance in relation to any of the issues raised above, then please get in touch.

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