The UK’s changing stamp duty land tax landscape
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In this interview, Chris Connors, head of corporate tax for Clarke Willmott LLP, talks to Jessica Bradley, associate director at BMS Group, about stamp duty land tax litigation in the UK and HMRC’s current approach.
Jessica: Why do you think stamp duty land tax (SDLT) litigation is such a central issue in the UK tax market at the moment?
Chris: The legislation covering SDLT was introduced in 2003, but since then there have been a number of ad hoc amendments to that legislation as the government have sought to tighten up specific areas of exposure (or perceived exposure in some cases). That in turn has added to the complexity of the drafting, and some of the newer provisions do not necessarily fit neatly with the wider legislation. This leads to a couple of things; firstly, HMRC has to issue revised guidance for advisers (but that guidance is not itself legally binding), and secondly the application of the legislation and HMRC’s guidance are open to challenge, leading to litigation.
Jessica: So the changes are increasing complexity in some cases, which is leading to uncertainty. Some of the other key changes in the legislation seem to be around the rates of SDLT which apply to transactions – is that feeding into the issue?
Chris: That’s certainly true. When SDLT was introduced, the rates applicable were up to 4% on chargeable consideration other than rent. If you look at the regime now, the rates applicable to residential property can be up to 17%. Because of all of the different permutations and rules, it is also increasingly difficult to determine where a transaction should fall in those rates. For example, a buyer (or their adviser) often needs to consider thinks like whether the 3% ‘additional property’ or 2% non-resident surcharge could apply. Conversely, something like multiple dwellings relief could apply to reduce the SDLT burden – and all of that is just on the residential side. Commercial leases come with their own problems and considerations.
Jessica: What queries are you personally seeing in the market?
Chris: I am getting a lot of questions on residential property acquisitions, and particularly acquisitions of farmland and larger estates. Because the rates of SDLT have changed so dramatically, there are questions around the application of multiple dwellings relief and ‘subsidiary dwellings’ (also known as granny annexes). There are also a lot of queries as to what actually constitutes ‘residential’ for SDLT purposes – it is fairly fundamental for people buying a house but not necessarily straightforward, which is why HMRC have issued further guidance on the area recently, and why there are a number of recent and ongoing cases on the topic.
As well as being asked to advise on the law by conveyancers, I am increasingly being asked to input in respect of previous transactions where the previous conveyancers might have missed an opportunity to mitigate SDLT. Availability of multiple dwellings relief is the classic example of this, and there are a number of companies which now specialise in litigating these sorts of issues - which has only increased as a result of a case called Secure Service, which confirmed that the relief needs to be claimed within 12 months of the SDLT filing date, not four years as many advisers had previously thought.
Anecdotally, I hear that these sorts of claims are now filtering through and affecting advisers’ payment protection insurance (PPI) premia, quite significantly in some cases.
Jessica: You mentioned that commercial property is not immune to risk as well. Can you give some examples of areas which need thinking about?
Chris: Commercial leases have been under the spotlight recently, as many companies (retailers in particular) have looked to regear their portfolios in light of the pandemic. Renegotiating lease terms can have all sorts of tax consequences, particularly in respect of VAT and SDLT, and I have dealt with a number of clients who have (for example) been asking whether it is better to run down existing leases and take a reversionary lease, or whether to surrender the existing lease and take a new one on different terms. Depending on a few factors the two different routes can have wildly different SDLT costs, which is something advisers need to be live to, particularly from a PPI perspective.
The other key issue you often find with commercial properties is the sheer SDLT value, due to large portfolios and high lease rents. On one end of the scale, I have worked on a matter involving c.14,000 properties and c. 500 million pounds value, which required bespoke SDLT filings. It is not necessarily a major issue if a practitioner makes a small mistake on one SDLT filing, but factoring that mistake through a large portfolio could exponentially increase the client’s liability.
HMRC have a limit as to how lenient they can be, particularly as the legislation is often fairly prescriptive. Commercial SDLT is an area where I think, if the deal value is significant enough, there is scope for bespoke insurance products to play a part in bridging that exposure.
Jessica: Thank you Chris. We frequently receive insurance queries regarding SDLT matters. As you note, given the potentially large sums at stake, and the complexity of applying legislation in certain instances, it remains one of the most commonly insured tax risks in the transaction liability insurance market.
Associate director, BMS Group