SDLT refunds: companies still encouraging buyers to make unfounded claims

Warren Gordon and Morris Graham look at areas where stamp duty land tax (SDLT) repayment agents are pushing boundaries and encouraging spurious claims for refunds, including chattels apportionment, properties ‘not suitable for use’ and ‘communal facilities’.

The Law Society is being contacted by conveyancers concerned with the approach being taken by some agencies that offer help with stamp duty land tax (SDLT) refunds.

Some of these firms are set up by people with little or no expertise in the tax and pay little or no regard to HMRC’s guidance on standards for agents.

These repayment agents often contact purchasers directly after the purchase, using Land Registry records to identify properties.

They are growing their presence on the internet and social media, sometimes offering their advice to conveyancing solicitors before completion.

In the Law Society’s last article, HM Revenue and Customs’ (HMRC) and the Law Society warned readers of the risks associated with SDLT repayment agents and explained how solicitors can take steps to protect clients.

The Law Society now returns to look at other areas where SDLT repayment agents are pushing boundaries and encouraging spurious claims.

The examples in this article are based on HMRC’s view of the law.

SDLT: a self-assessed tax

As a self-assessed tax, it is the responsibility of the taxpayer to get things right. This applies to the SDLT return and any subsequent amendment or claim as well.

Using an agent doesn’t change this.

HMRC usually operates on a ‘pay now, check later’ basis, processing claims for repayments quickly without carrying out a detailed assessment of the claim.

But HMRC’s guidance explains that it reserves the right not to do so for revenue protection reasons.

Under ‘pay now, check later’, HMRC can, and does, check claims even after the refund has been made and the agent has received their fee.

If the claim is wrong, the taxpayer will be liable to repay the refund plus interest. They may also be charged a penalty calculated in relation to the refund obtained.

This can leave buyers in a worse position than if they had not made a refund claim at all.

Areas of concern:

Chattels apportionment

SDLT is not due on sums paid (apportioned on a just and reasonable basis) for chattels.

HMRC updated its SDLTM04010 guidance, which sets out the way in which HMRC will apply the legislation.

Some claims companies seem to believe that “fittings” always count as chattels.

There are examples of unreasonably inflated apportionments, with some agents saying on average they can get a refund of 5% to 15% of the SDLT paid.

Where a purchase price notified to conveyancers includes chattels, it is good practice for these to be scheduled and dealt with in the contract, with the price apportioned on a just and reasonable basis.

If that involves a change in the price recorded on the transfer, the change will likely require reporting to a lender.

Therefore, where a price is agreed at the outset including high-value chattels, conveyancers should give advice early on so the transfer price can be notified to lenders in good time.

HMRC’s view is that the valuation should be based on the open market value of the chattel item at the date of transfer, including depreciation, not the cost of replacing that item.

Conveyancers should take care if asked to advise on the figures for the apportionment.

Although general guidance on the law can be given, it is not within conveyancers’ professional expertise to approve specific figures.

Apportionments of consideration to chattels should be commercially negotiated between principals to the transaction and must be agreed by them on a reasonable basis.

Clients must keep evidence of any apportionment.

If the conveyancer is aware that the buyer insists on apportioning the price in a way that is not reasonable, the conveyancer may want to consider if they should cease to act.

The client may wish to seek advice from their accountants or specialist tax solicitors about any possible exposure to liabilities to further tax, interest and penalties and possible criminal sanction.

Solicitors cannot advise as to the value of chattels and are not expected to know the value or even the reasonable value.

It is recognised that often parties will, after a residential property purchase is agreed, make arrangements directly for other items to be bought at completion and for sums additional to and separate from the purchase price being dealt with by the conveyancers.

In such a case, SDLT problems are unlikely to arise with the sums negotiated for those chattels because they will not be included in the purchase price of the property.

Example one: Sam

Sam bought a period property in Leeds. The vendor was a musician.

While the house had not been refurbished for several years, a room was set up as a soundproofed music room, complete with sophisticated audio and recording equipment, along with two vintage armchairs.

As a budding guitarist, these items appealed to Sam, and he negotiated a price of £5,000 to acquire them with the purchase. These items were listed on the Law Society’s TA10 form alongside the agreed price. The total paid was £310,000.

Also listed on the TA10 form, but with no separate negotiated value were blinds, curtains, lights, and carpets, as well as a desk and garden ornaments. These were left in the property on completion.

While not to Sam’s taste, he used these until redecorating each room, and then donated them to charity. The vendor also left white goods in the kitchen, which weren’t fully working and had to be replaced. The price recorded in the Land Registry TR1 form was £305,000.

Sam’s solicitor filed the SDLT return on his behalf, carrying out an apportionment of the consideration relating to the house, and relating to the music equipment and armchairs.

None of the consideration was apportioned to the other items left behind, as no value had been attributed to these during the property negotiation.

As the price agreed between the two parties was broadly the market value (taking into account the age and condition of the items), the solicitor declared SDLT on the purchase price of £305,000 at the residential rates. They paid the SDLT due of £2,750.

After the purchase, Sam came across a social media advert for OLR Tax, claiming they were specialists in obtaining refunds for people who had overpaid SDLT on chattels.

OLR Tax offered a ‘no obligation’ call to discuss potential claims. During a call with an adviser, Sam was told he shouldn’t have paid SDLT on anything the vendor left in the property.

Sam completed a form online, and OLR Tax carried out a valuation of everything left in the property, calculating that it would cost £55,000 to replace the carpets, lights, curtains and furniture.

OLR Tax wrote to HMRC to amend Sam’s SDLT return to reflect this.

With revised consideration of £250,000, they claimed a refund of £2,750, which HMRC processed two weeks later. The company took 50% before passing this on to Sam.

HMRC opened a compliance check into the amendment several months later. OLR Tax provided HMRC with details of their apportionment and the values attributed to the chattels.

HMRC concluded that the amendment didn’t reflect a ‘just and reasonable’ apportionment.

The chattels had been valued ‘as new’, without accounting for condition and age. In reality, it was clear that the vendor and purchaser had not attributed any value to them so no apportionment for these items was appropriate.

Only the money given for the audio and recording equipment and armchairs, which had been negotiated separately, reflected consideration for a non-land transaction.

Sam must now repay £2,750 plus interest and penalties even though OLR Tax only paid Sam £1,375 after deducting their fee.

Properties that are ‘not suitable for use’

Repayment agents are approaching homeowners after they have purchased a property, encouraging them to submit claims that the property was in such poor condition that it is not capable of meeting the definition of residential property.

Some firms suggest that even potentially minor defects – such as missing bathroom fittings, leaking roofs or faulty heating systems – will make claims successful.

A property must have deteriorated or been damaged to such an extent that it no longer comprises a dwelling, for it to be accepted as non-residential property.

HMRC say that this only applies to a very small minority of buildings. Therefore, many claims are likely to be incorrect.

The First-tier Tribunal (FTT) decision of Mudan [2023] addressed the issue of whether a house, in poor condition but which had been recently occupied, was suitable for use as a dwelling, and residential.

The decision highlights that a property would be residential even if, in its condition at completion, it would have been dangerous to occupy.

It did not matter that a property, which had recently been used as a dwelling, was not ready for immediate occupation.

The FTT decision was recently appealed to the Upper Tribunal (UT) in Mudan [2024] UKUT 00307.

The tribunal found that the FTT’s conclusions were fully justified, and there had been no error in law.

The decision confirms that there should be a focus on the “fundamental characteristics” and nature of a building over a period of time, rather than a snapshot of habitability at the effective date.

‘Suitable for use’ as a dwelling does not mean ‘ready for immediate occupation’.

The UT confirmed that the determination of ‘suitability’ is a multi-factorial assessment, and the need for works or repairs is only one factor.

The decision sets out a number of points to consider when determining the impact of the required repairs.

When applying these principles, the question is then “whether the works of repair and renovation needed to the building have the result that the building does not have the characteristics of a dwelling at the effective date, so it is no longer residential property”.

HMRC’s guidance at SDLTM00385 says:

“Whether a property is derelict to the extent that it no longer comprises a dwelling is a question of fact and should only apply to a small minority of buildings.”

Some companies are even prepared to submit a claim where flats were bought subject to tenancies and occupied. This is clearly wrong; the definition of residential property includes a building or part of a building “used as a dwelling”.

Example two: Harpreet

Harpreet purchases a Victorian house in London. The property, previously owned by the same occupant for 60 years, required some updating.

The property was sold with vacant possession, with the vendor moving out a month before completion.

Conscious of the state of the property, Harpreet obtained a Homebuyer’s Report. This confirmed that the property required re-wiring, areas of the roof needed replacing, it had damp, and required a new kitchen and bathroom.

Harpreet felt that the agreed purchase price (£1,100,000) reflected the condition and proceeded with the purchase.

On completion, Harpreet’s solicitor filed the SDLT return, with SDLT calculated at the residential rates totalling £51,250.

Harpreet stayed with family while refurbishing the property. Shortly after moving in, he received a leaflet in the post from ‘SDL Tax Back’, who explained that as Harpreet had purchased an ‘uninhabitable’ house, they could obtain a refund, on a ‘no win, no fee’ basis.

The leaflet advised they had secured hundreds of refunds following a recent tribunal decision.

The leaflet didn’t mention that HMRC’s guidance explains there is a key difference between a derelict property and a dwelling in need of modernisation, renovation or repair, which can be completed without first addressing structural defects that would make the property dangerous to work on and or live in.

SDL Tax Back advised Harpreet he would be entitled to a refund of £6,750, less their 30% fees. Harpreet agreed for SDL Tax Back to make a claim on his behalf.

SDL Tax Back amended the return, and shortly afterwards Harpreet received his repayment.

Six months later, HMRC opened a compliance check into the amendment. HMRC’s caseworker concluded that the property was residential, as declared on the SDLT return by the original conveyancer.

Harpreet found out that he owed £6,750 SDLT, plus interest and a penalty, even though SDL Tax Back only sent him £4,725, after they deducted their fee.

HMRC highlighted its guidance, and the recent tribunal decision of Mudan to support their conclusions and raised assessments for the tax repaid, along with interest and penalties.

Harpreet didn’t want the stress and cost of a tribunal appeal, and after reviewing HMRC’s guidance and other tribunal decisions, accepted the findings.

He was now financially worse off, as SDL Tax Back refused to cover the interest and penalty.

‘Communal gardens’ and ‘communal facilities’

Repayment agents have been approaching purchasers of residential properties that benefit from access to communal gardens, and communal facilities.

HMRC maintains that these purchases are entirely residential with SDLT being due at the residential rates, and the First- tier tax tribunal has agreed.

In Kwasi Bonsu and Divine Bonsu v HMRC [2024], the appellant acquired a flat which benefitted from access to a communal garden.

The appellant argued that the right over the communal garden was non-residential, and therefore SDLT should be calculated at the lower non-residential rates.

The First-tier Tribunal found that only the property (the flat) should be considered when determining what rate of SDLT to use. Even if the communal garden was to be considered, then the transaction would still be entirely residential.

This is the third clear and unequivocal First-tier decision supporting HMRC’s view on this matter. It follows the First-tier decisions in Nael Khatoun v HMRC [2021] and Danielle Sexton and Emma Sexton v HMRC [2023] UKFTT 00073.

In all three cases, which were claims bought by an agent, the tribunal has found that a residential property acquired with the right over communal gardens is wholly residential.

Example three: HIJ Wealth

HIJ Wealth act for wealthy overseas individuals, many of which are developing portfolios of high-end UK real estate.

SD Tax Specialists approached them, agreeing to offer specialist SDLT advice on their conveyancing transactions.

As part of the agreement, SD Tax Specialists will provide advice on individual transactions. HIJ Wealth will continue to act for their clients and file their SDLT returns.

Several of HIJ Wealth’s clients are purchasing apartments in prestigious London developments. Each apartment has access to a shared garden, swimming pool and gym.

SD Tax Specialists advised HIJ Wealth that SDLT shouldn’t be calculated at the residential rates, as the right to access and use these communal facilities is non-residential property. Therefore, the transaction is ‘mixed‘ with SDLT calculated at the lower non-residential rates.

Unaware of the First-tier tribunal decisions of Khatoun, Sexton and Bonsu, HIJ Wealth relied on this advice, and filed SDLT returns for several clients on this basis.

HIJ Wealth and their clients received HMRC enquiry notices several months later, which advised that HMRC understand the properties to be entirely residential.

The enquiry notices referred to HMRC’s guidance and relevant tribunal decisions. HMRC subsequently issued closure notices, charging the property purchasers additional SDLT and interest. They also advised that they are considering penalties.

HIJ Wealth reviewed all the facts, in line with the legislation and case law, and despite the advice from SD Tax Specialists, they concluded that their clients do not have a reasonable prospect of successfully challenging HMRC’s findings.

Several of their clients were very unhappy and complained directly – they trusted HIJ Wealth to act in their best interests, and they believed they have been misled and are now out of pocket. This has negatively impacted client relations.

Advice for solicitors: declarations:

Solicitors faced with a client who instructs them to make a claim for a refund by amending their return, might mention to the client that such an amendment is a self-assessment and they might also ask the client to sign a declaration, adapted from the one set out on the land transaction return.

For example, it could read:

“The information given on the attached form of amendment to my land transaction return is correct and complete to the best of my knowledge and belief.”

A solicitor should not submit a claim which they know to be incorrect.

Find out more:

Morris Graham and Warren Gordon address the risk of claims for mixed use treatment and multiple dwellings relief.

HMRC sets out the risks of SDLT repayment agents.

In a guest blog for the Chartered Institute of Taxation, John Shallcross, Leigh Sayliss and Sean Randall cover a wide range of refunds that might be too good to be true.

 

Kindly shared by The Law Society of England Wales