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House keys | AccountingWEB | Costly oversight in SDLT case
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Oversight proves costly in SDLT case

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Amy Chin looks at a stamp duty land tax (SDLT) case where a proposed house move led to a costly oversight being made.

28th Jun 2024
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Yasir Ali had lived in his family home in Ilford, Greater London (Mayfair Avenue) for more than a decade when the family decided they had outgrown the property and it was time to sell up and move.

The process began smoothly; the family entered into a chain to sell Mayfair Avenue and purchase a larger home. Sadly, the vendors pulled out unexpectedly at the eleventh hour and the chain collapsed.

No doubt concerned that it could happen again, Ali consulted a mortgage adviser who devised a strategy to enable him to borrow sufficient money to purchase a new house without needing to find a buyer for Mayfair Avenue.

Transferring the property

This involved transferring the property into a company, Mayfair Avenue Limited (MAL), set up by Ali for the purpose of renting it out. A mortgage could then be taken out by the company and the funds put towards somewhere new.

On 30 June 2021, MAL bought the property from Ali for £650,000. The stamp duty land tax (SDLT) return was submitted on the same day and £27,000 of SDLT was paid. It seems to have been accepted by HMRC that the £650,000 price was the market value of the property, as the point was not raised in the tribunal decision. Had the market value been higher, then SDLT would have been charged on that higher value.

Although this plan succeeded in securing the funds to purchase a family home, the process of buying the new property took longer than anticipated and so the family remained in Mayfair Avenue for a further 10 months, finally moving on 13 May 2022.

Unbeknown to Ali, the decision to remain in the property after ownership transferred to the company would turn out to be a costly oversight.

Higher SDLT for companies

The £27,000 SDLT was calculated on the basis of the slice rates applicable during the SDLT holiday allowing for the extra 3%; so at 3% for the first £500,000 and at 8% for the remainder. However, a higher rate of 15% can be chargeable on residential properties costing more than £500,000 bought by certain corporate bodies, including companies.

Relief may be available in certain circumstances, with the relevant one here being if the property is to be used in a property rental business. However, that relief is withdrawn by paragraph 5 of Schedule 4A FA 20023 which states: “A chargeable interest does not count as being acquired exclusively for one or more of those purposes if it is intended that a non-qualifying individual will be permitted to occupy a dwelling on the land.”

As the sole director and shareholder of MAL, Ali was a “non-qualifying individual”.

The question for the first tier tribunal (FTT) was whether, at the time of the sale of the property to the company, the intention was for Ali to live there.

Best intentions

Ali claimed that the company’s intention was always to rent Mayfair Avenue out and that he had tried in vain to find a suitable rental property for his family to move into to facilitate this.

He also stated that he had not made any financial gain as he had, as advised, paid full market rate rent to the company while the family was still living in the property.

Agreeing with HMRC, the FTT concluded that as Ali, the director of the company, knew that he would be living in the property with his family, it was the company's intention from the effective date of the transaction that Ali would occupy the dwelling.

On the financial gain point, the judge noted that the statutory conditions did not require Ali or MAL to have made any financial gain from the arrangement for the higher rate of SDLT to apply.

Unfair legislation

Ali argued that he was unaware of the higher rate of SDLT applicable to the transaction. He had consulted a mortgage advisor and his solicitor, who had filed the SDLT return. Neither had mentioned the 15% rate to him. Had he known, he would not have stayed in the property.

The FTT could not consider this point as it was beyond its remit.

Ali went on to raise an interesting argument about the lack of fairness of the rules, lamenting that “HMRC always stick to the point of law but don’t consider the human element” and “this is very unfair… tax should not be there to catch people out”.

The Tribunal referred to its powers and said: “None of these powers enable this tribunal to provide discretionary relief or mitigation on the grounds of fairness. We therefore find that the statutory powers do not enable us to consider fairness.”

The taxpayer’s appeal was dismissed and MAL must pay an additional £70,500 in SDLT, a warning for anyone advising, or seeking advice in this area.

Dangerous area

John Shallcross, SDLT specialist at Blake Morgan, explains: “This is a dangerous area for conveyancers to advise on; there are many traps.

“The legislation is pretty tough. Staying in the company property for a few days for a holiday would cause the 15% rate to be due. In one case, even having the ability to use it for holidays was enough to bring the 15% on their head.

“There is no grace period in the legislation; one of the arguments of Ali was that the legislation should allow a grace period. This was rejected as beyond the gift of the tribunal.”

Shallcross noted that it was interesting to compare the decision in Mayfair Avenue with the one by the FTT on 18 March 2024 in Investment and Securities Trust Limited vs HMRC.

“The Tribunal in that case found that the property interest (an option) was not acquired for the exclusive purpose of development and resale in the company’s property development trade.

“One of the reasons for that finding was that the company had entered into the unusual transaction (paying an option fee of half of the value of the property) so as to meet the vendor director’s urgent needs for funds.”

Undermining the requirement

Shallcross said that there was “no suggestion in the Mayfair Avenue case that Ali’s purpose in selling the property to the company (to facilitate his onward purchase and presumably save him from the extra 3% SDLT on that) should someone be imputed to the company”.

“If Mr Ali’s purpose had been imputed to the company, that would undermine the requirement that the company’s exclusive purpose of the acquisition be for use in a property rental business.

“One would not expect that in routine cases the intention of a director as seller should be imputed to the company as buyer. The facts of Investment and Securities Trust Limited were far from the norm, with a highly unusual transaction structure designed to suit the seller/director.”

Replies (5)

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By Justin Bryant
28th Jun 2024 12:26

Perhaps Mr Ali should consider suing his conveyancer for overlooking this 15% SDLT problem issue.

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Replying to Justin Bryant:
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By Paul Crowley
28th Jun 2024 12:45

Hopefully he did not look for the cheapest on line person.

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Replying to Justin Bryant:
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By hyper10
01st Jul 2024 09:37

He could and likely lose another 70K trying, what conveyancer have you dealt with throws in free insured tax advice, these schemes are great but laying it at the conveyancers door is about the same as blaming whoever formed the company.
If people want to be "players" they should know the game

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Replying to hyper10:
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By Justin Bryant
01st Jul 2024 10:26

Eh? What scheme (this is not a complex scheme, and is a straightforward property transfer, albeit with SDLT risk)? If you Google the conveyancer's duty of care here (under the relevant negligence case law re potential tax issues) you'll see I'm right (unless perhaps they have specifically carved that out of their engagement terms).

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VAT
By Jason Croke
01st Jul 2024 07:37

Seems a fairly obvious point to fall down on (the 15% higher rate applicable to property held in a company and occupied by the owners), so does look like poor advice....which is a good reason why people should consult (and pay for) good quality advice when entering into structures which are not commonplace (commonplace as in, most people don't set up a company to buy their own main residence whilst they look for another main residence).

We should refer posters on AnyAnswers to this article as a reason why trying to do things cheap/DIY is never a good idea.

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