The rates of Stamp Duty Land Tax (“SDLT”) are high at the moment. If you are thinking of buying a property, take a look at our SDLT Calculator for clients, or go on the HMRC website and use their calculator, and you will find that, for instance, buying a nice residential property in the country as a second home for £750,000 could cost you nearly another £50,000 in SDLT, even after the recent (possibly temporary) increase in the tax-free threshold. As a result, there is a certain amount of ducking and diving going on. Firms of specialist consultants have been approaching purchasers of high value properties with a number of inventive schemes to solve the problem.
So what can you do? Well, supposing that the property you are buying includes a granny annexe, or ground floor bathroom and bedroom suitable for granny, you might try to claim that you are buying two separate properties, with each qualifying for the tax-free threshold of £250,000 (although the threshold for the 3% “Additional Rate” SDLT for second homes still applies below that level). If, say, the granny annexe costs £250,000 and the main house £500,000 in the example above, that’s a total SDLT for two separate properties of only £20,000 – much better! In a number of recent cases, however, such claims have been challenged by HMRC. If you cannot demonstrate that there are really two separate “dwellings” (different addresses, separate gas and electicity supplies, separate land registry title listings – all are relevant factors) you will be in trouble.
SDLT rates are only high in relation to residential properties however. What if you can claim that the property is really “mixed” use, because some business or public use of part of the space means you do not have exclusive use of the whole property for private residential purposes? This was the point at issue when James Averdieck, the founder of the successful GÜ desserts business, bought a large country house with 14 acres of grounds for £2,999,000 (sounds so much less than £3,000,000 doesn’t it?) Initially, he filed an SDLT return for the payment of £258,630 (ouch!). He was then advised by a specialist SDLT mitigation firm, however, and went back to HMRC claiming that the property was “mixed use” because of a footpath crossing it, which he was required to maintain for public use. This reduced the SDLT payable to £139,450 – quite a saving! Unfortunately HMRC were not convinced, and the case ended up in the Tax Tribunal. Despite an additional argument that a lane over the property was used for farm access, and so a business use, the taxpayer’s arguments ultimately failed.
Interestingly, the firm which advised Mr Averdieck, Cornerstone, had a problem closer to home last year. Its leading partner, David Hannah, had used a more complicated scheme when he bought his own property back in 2011. The purchase price was £765,000, but the contract stated that, in addition to the deposit amount of £38,250 Mr Hannah could pay the balance by giving a perpetual annuity to the vendors, which they could then surrender for £726,750 (and in fact did so, before completion), the burden of the annuity having been transferred, in the meantime, to an offshore entity. Because it could be argued that the consideration was fixed at the time of exchange, and legislation deemed the value of an annuity to be only 12 times the annual amount payable under it, the net effect of this was that no SDLT would be payable at all. This rather artificial scheme (known as the “Trust and Covenant” or “T&C” scheme) was challenged by HMRC who got judgement in the Tax tribunal against Mr Hannah in 2019. His appeal to the Upper Tax Tribunal then failed in 2021. The detailed analysis is beyond the scope of this article, but it is perhaps sufficient to say that the court noted drily that, if the annuity had not been surrendered before completion, it would have taken 1,893 years for the vendors to achieve full payment.
One thing is for sure: if SDLT rates stay as high as they are, the stream of test claims and contested cases will continue to flow.