Compass blog: Stamp Duty Land Tax risks and how to solve them

Stamp Duty Land Tax (SDLT) has been the hot topic of the last few years, and that trend looks set to continue, regardless of the end of the Chancellor’s holiday.

With new surcharges being introduced all the time (the latest being the 2% Non-Resident Surcharge) there are more and more potential hazards for firms dealing with property purchases on both a residential and commercial basis.

As claims against firms for missed reliefs rise, and the regulatory framework becomes tighter and potentially more costly, we look at some of the biggest risk factors when buying a property in the U.K. in relation to SDLT and how you can minimise them.

Multiple Dwellings Relief

Introduced in 2011, MDR has been the focus of a lot of attention in the last 18 months as it becomes clearer and clearer that many firms have not fully realised the potential for its relevance outside investment purchases of blocks of flats or large numbers of houses.

In fact, any property which may reasonably be defined as being multiple dwellings may qualify, including properties with so-called ‘Granny Annexes’ and larger properties with separate dwellings within their grounds.

These properties may qualify for MDR which can result in substantial reductions in SDLT (£10 – 87,000) but this is often not taken into account by firms and can lead to claims against them from disgruntled clients down the line.

If there is any indication that a property might comprise of more than one dwelling, it’s always worth investigating to find out the precise details so that you can ascertain whether the relief might apply – a little additional work now can save a lot of pain later.

Mixed Use

If a property is not entirely residential, it may be mixed-use, which can in turn lead to a smaller SDLT bill. Mixed-Use properties include those with commercial premises attached, substantial agricultural land or other additional land which is in use by a third party.

As with MDR, spending a little time at the start of a transaction establishing exactly what elements make up a property and how they are used can save the pain of a dissatisfied client and a costly claim later on.

Surcharges

In 2016, the Higher Rate on Additional Dwellings was introduced, also known as HRAD or the 3% Surcharge. In 2022 the Non-Resident Surcharge was introduced. For both of these, it is critical to understand the exact position of the buyer in relation to the relative legislation in order to ensure the correct SDLT amount is paid.

Many factors can impact what might look like a straightforward rule, be it the precise circumstances of the buyer looking to acquire an additional residence or the precise nature of an individual’s residency when buying a U.K. property.

A careful examination of the legislation and how it compares to your client’s circumstances is the obvious first step here, but seeking expert tax advice is also generally a good idea, whether from a specialist in your own firm or a third party adviser.

Transfers between connected parties

Often not picked up on, where a property transfer takes place either to or from a Partnership and “connected persons”, SDLT liability is zero.

One example is the transfer of a commercial premises of a company into the pension scheme of the company itself. Many such transfers are made, and in our experience legal advisers have often missed that these transactions qualify as zero SDLT transfers.

When advising on a transfer, establishing whether any parties are connected should be one of the key considerations, regardless of the nature of the transfer itself. By ascertaining this, you could leave your client with the welcome news that they have no SDLT liability at all!

And there’s more….

These are just some examples, of course. The truth of the matter is that with 49 reliefs, exemptions and exceptions in the SDLT legislation as of the time of writing it is all too easy for a conveyancing lawyer to miss one or more of these, which can do serious damage both to the reputation of the firm and their bottom line if claims result in increased PII premiums and/or a regulatory investigation.

With the Law Society’s requirement since 2019 for firms to produce detailed audits as to how SDLT figures are calculated and the SRA looking at increasing the maximum levels of fines it can apply to firms, now is the best time to ensure that your firm is protected from making these kinds of errors.