My Budget prediction for the last three budgets has been that the 3% surcharge would be increased. I have been wrong every time so far, but it will be back on my list for the 3 March 2021 Budget. It will be interesting to see if it takes effect the following day, as per the Welsh change. This seems rather unfortunate, given the market tendency now for simultaneous exchange and completion.
No-one has said what the price is! If it is under £1,215,000 and the 3% surcharge would not have applied to a residential purchase, then during the SDLT holiday the SDLT would be less at the standard residential rates than the non-residential rates.
There is a special SDLT rule about the 3% extra SDLT not applying where someone is enlarging their interest when they had at least a 25% share already and have lived in the property throughout the previous three years as their only or main residence.
One point I see a little differently though is the analysis about the missing door. If there had been one "evidently in place recently", but it was not in place at completion, the Tribunal may well have been satisfied, based on what they said. So I think the problem for an MDR claim is where there has not been a door (or at least has not evidently been one recently) rather than where one has recently been taken out.
There is quite a lot in the judgment to take in. It has yet to be posted on the First Tier Tribunal website and I cannot see a way of attaching documents to these posts.
Perhaps more thought should be given to where the beneficial ownerships will lie. If the two brothers now jointly own the shop and flat, do they intend to continue that economic arrangement? You seem to envisage your client brother beneficially owning the lease of the flat. If that happened would not the other brother want something else in return, like the freehold interest? That would then constitute consideration for SDLT.
What I have seen done is for the freehold to be contracted to be sold to another party (perhaps one brother) for a modest sum in consideration of the grant back of two long leases at peppercorn rents. Here one brother would end up with a freehold of very modest value. The two brothers would hold the two leases (carrying the value) in the same proportions as they started.
I do not know how that is treated for capital gains tax purposes. For SDLT purposes it works well according to HMRC guidance.
The chief advantage is that in economic terms the brothers start off jointly owning a valuable freehold; they end up jointly owning two valuable leases suitable for use as security. This also avoids the use of nominees which can cause issues with borrowing.
The 3% extra does not apply to transfers between spouses who are living together. But a return to HMRC on SDLT1 is needed still if the chargeable consideration is over £40,000.
The 3% surcharge rules work out badly for an unmarried couple like this. The extra 3% was properly payable at the time of the 2018 purchase and is not repayable on account of the sale of John's small house. Even if Janet later sells her flat, that will not entitle them to recover the 3% surcharge. That is because she had not lived in her flat within the three years leading up to the 2018 purchase. See FA03/Sch4ZA/para3(7).
I have had a think at the SDLT aspect. A 2/5 undivided share in a jointly owned property worth £425,000 would "count against" the siblings three years after acquiring the share, see https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdlt.... (By "count against" I mean that Condition C for the 3% surcharge is met).
The sibling who lives in job related accommodation and owns a let property will not be able to rely on the "replacement condition". (By "replacement condition" I am referring to Condition D.)
If the Will is varied so the siblings have instead a 1/3 interest then arguably the interest "counts against them" as soon as they have a property interest (on assent, appropriation or the administration of the estate being complete). That is because FA03/Sch4ZA/para16 refers to interests acquired "by virtue of an inheritance" and that might not be wide enough to catch an interest acquired by virtue of a variation of the Will.
If trust arrangements are set up so the step-father has a right (under the trust) to live in the property for life, or a right to the income, then the property will not "count against" the siblings for surcharge purposes. See FA03/Sch4ZA/para11.
My answers
My Budget prediction for the last three budgets has been that the 3% surcharge would be increased. I have been wrong every time so far, but it will be back on my list for the 3 March 2021 Budget. It will be interesting to see if it takes effect the following day, as per the Welsh change. This seems rather unfortunate, given the market tendency now for simultaneous exchange and completion.
Thank you Justin, I thought you might be the first to spot this.
No-one has said what the price is! If it is under £1,215,000 and the 3% surcharge would not have applied to a residential purchase, then during the SDLT holiday the SDLT would be less at the standard residential rates than the non-residential rates.
Justin has already kindly put up a link to the decision on Patrick Cannon's website. It can now be found too on the First Tier Tribunal's web page here: http://financeandtax.decisions.tribunals.gov.uk/Aspx/view.aspx?id=11632
There is a special SDLT rule about the 3% extra SDLT not applying where someone is enlarging their interest when they had at least a 25% share already and have lived in the property throughout the previous three years as their only or main residence.
This rule came in from 22 November 2017 and is explained in section 3 of the paper here: http://2kxoi048lz5d327itw3e7f8c-wpengine.netdna-ssl.com/wp-content/uploa...
It looks as if this exception from the surcharge might apply here.
Thanks Justin. Good points and well made.
One point I see a little differently though is the analysis about the missing door. If there had been one "evidently in place recently", but it was not in place at completion, the Tribunal may well have been satisfied, based on what they said. So I think the problem for an MDR claim is where there has not been a door (or at least has not evidently been one recently) rather than where one has recently been taken out.
There is quite a lot in the judgment to take in. It has yet to be posted on the First Tier Tribunal website and I cannot see a way of attaching documents to these posts.
Perhaps more thought should be given to where the beneficial ownerships will lie. If the two brothers now jointly own the shop and flat, do they intend to continue that economic arrangement? You seem to envisage your client brother beneficially owning the lease of the flat. If that happened would not the other brother want something else in return, like the freehold interest? That would then constitute consideration for SDLT.
What I have seen done is for the freehold to be contracted to be sold to another party (perhaps one brother) for a modest sum in consideration of the grant back of two long leases at peppercorn rents. Here one brother would end up with a freehold of very modest value. The two brothers would hold the two leases (carrying the value) in the same proportions as they started.
I do not know how that is treated for capital gains tax purposes. For SDLT purposes it works well according to HMRC guidance.
The chief advantage is that in economic terms the brothers start off jointly owning a valuable freehold; they end up jointly owning two valuable leases suitable for use as security. This also avoids the use of nominees which can cause issues with borrowing.
The 3% extra does not apply to transfers between spouses who are living together. But a return to HMRC on SDLT1 is needed still if the chargeable consideration is over £40,000.
The 3% surcharge rules work out badly for an unmarried couple like this. The extra 3% was properly payable at the time of the 2018 purchase and is not repayable on account of the sale of John's small house. Even if Janet later sells her flat, that will not entitle them to recover the 3% surcharge. That is because she had not lived in her flat within the three years leading up to the 2018 purchase. See FA03/Sch4ZA/para3(7).
I have had a think at the SDLT aspect. A 2/5 undivided share in a jointly owned property worth £425,000 would "count against" the siblings three years after acquiring the share, see https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdlt.... (By "count against" I mean that Condition C for the 3% surcharge is met).
The sibling who lives in job related accommodation and owns a let property will not be able to rely on the "replacement condition". (By "replacement condition" I am referring to Condition D.)
If the Will is varied so the siblings have instead a 1/3 interest then arguably the interest "counts against them" as soon as they have a property interest (on assent, appropriation or the administration of the estate being complete). That is because FA03/Sch4ZA/para16 refers to interests acquired "by virtue of an inheritance" and that might not be wide enough to catch an interest acquired by virtue of a variation of the Will.
If trust arrangements are set up so the step-father has a right (under the trust) to live in the property for life, or a right to the income, then the property will not "count against" the siblings for surcharge purposes. See FA03/Sch4ZA/para11.