Stamp Duty Land Tax

This article was first published in Taxation magazine on 3 November, 2022

Key points:

• Stamp Duty Land Tax (SDLT) is payable by the purchaser within 14 days of the effective date – time is of the essence!
• The amount of SDLT due will depend on the profile of each purchaser, the nature of the property acquired and whether any reliefs are available. These issues can be judgemental
• The residential SDLT bands changed with effect from 23 September 2022
• Applying the right rates of claiming reliefs could save £000s
• There is a 12-month amendment window so all is not necessarily lost if a valid claim has been missed

Despite the lifting of many COVID-related travel restrictions, many Brits have discovered or rekindled a love of staycationing during the pandemic and this trend is expected to continue, especially as international travel chaos continued over the summer months and in light of the squeeze on budgets as a result of the cost of living crisis.

With industry experts predicting strong growth in the UK leisure and tourism sector, investing in holiday property could be an attractive option despite the end of the pandemic-related reduced SDLT rates for residential property.

Many readers will be familiar with the tax-advantages of operating a furnished holiday let (FHL) business, but perhaps lesser known are the stamp duty land tax (SDLT) savings that can be achieved when investing in residential property by ensuring that the correct rates and reliefs are applied.

With over 10 bases of preparation (common rates of SDLT, reliefs and/or combinations thereof) potentially applying to a purchase of residential property by individuals, and more applying to company purchases, getting the SDLT right can be a minefield.

We have selected some key issues and common scenarios applying to the leisure and tourism industry to explore in more detail. All statutory references are to Finance Act 2003.

For simplicity we will only cover matters relating to SDLT applying in England and Northern Ireland in this article. However, it should be noted that the position may differ for purchases in Wales or Scotland, which apply Land Transaction Tax (LTT) and Land and Buildings Transaction Tax (LBTT) respectively.

Initial considerations

So, what are the key SDLT considerations when faced with an upcoming holiday property purchase?

SDLT is payable by the purchaser in a land transaction and is calculated according to the amount of consideration which falls into each of the appropriate SDLT rate bands (see residential and non-residential rates).

Consideration includes money and money’s worth (including the assumption of debt) given directly or indirectly by the purchaser or someone connected to the purchaser. 

How much time do I have?

SDLT is self-assessed and is due within 14 days of the effective date, being the earlier of completion or substantial performance.

Time is of the essence with SDLT analysis and it pays to be prepared to ensure the correct rates are applied, along with any reliefs, to obtain the optimum filing position. 

Who are the purchasers?

Considering the profile of each purchaser is key to determining the SDLT rates applicable, especially with residential land transactions.

For individuals, if any one of the purchasers has an interest in a dwelling with a market value of £40,000 or more (anywhere in the world) then the higher rate for additional dwellings (HRAD or 3% surcharge) will apply to the whole transaction unless the new property is replacing the purchaser’s home. This can impact a single purchase that comprises more than one dwelling unless the additional dwellings are ‘subsidiary’ (Schedule 4ZA).

If any of the purchasers are not individuals, including companies, corporate partnerships, pension funds, discretionary trustees, local authorities or similar, then the higher rates (3% surcharge) will usually apply. However, a flat 15% higher rate applies instead if a company or body corporate is buying a single dwelling for over £500,000 unless an exemption applies (Schedule 4A).

An additional 2% non-resident surcharge (NRS) will be added to the rate that would otherwise apply if any of the purchasers (individual or not) are non-UK resident. The SDLT residence tests (Schedule 9A) differ from the statutory residence tests for income, capital gains or corporation tax purposes and the results do not always align.

Is the subject matter residential property?

With a maximum residential rate of 17%, compared to just 5% for non-residential property, this is an area of HMRC scrutiny.

Residential property is defined in s.116 and catches any property which is used or suitable for use as a dwelling or is being constructed or adapted for such use. Residential property also includes garden and grounds, and land which subsists for the benefit of a dwelling.

Non-residential property means any property that is not residential property. Single land transactions comprising six or more dwellings are also deemed to be non-residential.

If any part of the subject matter (or linked transactions) includes non-residential property at the effective date, the transaction may be ‘mixed-use’, and the much lower non-residential rates will apply to the whole consideration. Mixed-use could apply to a holiday park comprising retail and entertainment facilities, or a working farm, for example. However, if the 15% flat rate applies to any single dwelling within the transaction, then this ‘trumps’ the mixed-use treatment in respect of that dwelling alone. 

Following a spate of spurious claims, HMRC pays particular attention to mixed-use transactions and claims for multiple dwellings relief (MDR) and these areas are subject to Government consultation.

HMRC guidance (SDLTM00210 onwards) was elaborated in 2019 to provide some clarity on key issues such as gardens and grounds and factors to consider when determining the number of dwellings, however, these continue to be contentious subjects and have been the subject of a number of Tribunal cases. 

What is a dwelling?

There is no statutory definition of ‘dwelling’. In addition to requiring all of the necessary facilities for day-to-day living (sleeping, cooking, living and bathing), HMRC guidance gives a number of factors to be considered in the round when determining the number of dwellings for MDR purposes.

Recent case law, for example Fiander and Brower v HMRC [2021] UKUT 0156, has focused on privacy, independence and physical configuration in particular. The case of Dower (TC8497)  looked at planning restrictions and the ability to sell a dwelling separately, which had not previously been given so much weight.

Holiday properties may be subject to the residential rates, even if they cannot be occupied all year and whether or not they are subject to short-term lets. However, all the facts need to be weighed up and considered in the round.

As a general rule, caravans, houseboats and mobile homes are not dwellings unless they are installed with a degree of permanence such that they become immoveable. Furthermore, beach huts do not usually include all of the facilities required for day-to-day living and so are not generally considered to be residential property. However, many such holiday properties can go either way and each case must be considered on its own merits.

What is multiple dwellings relief (MDR)?

Where more than one dwelling is purchased in a single or linked transaction(s), MDR allows the purchaser to calculate the SDLT due as if each property were acquired individually for an average price, rather than considering the aggregate consideration or separate market values. This can result in significant tax savings by keeping consideration in the lower tax bands (subject to a 1% de minimis).

For single transactions comprising multiple dwellings, the transaction will not be surcharged if one of the properties meets the ‘subsidiary dwelling’ criteria set out in paragraph 5 of Sch4ZA and if the main house is not surcharged, for example if the main house is replacing the buyer’s own residence or no other dwellings are owned. This might apply to an annexe used as a holiday cottage in the grounds of the purchaser’s home.

A reduction in the number of dwellings (other than by a sale to a third-party) within three years of the effective date may result in a clawback of the relief (Schedule 6B).

So, what does this look like in practice? 

Say I have £1 million that I want to invest personally in a holiday let business in the South West and I have identified 5 possible properties:

• An apartment in Poole
• A family home with a holiday cottage in the grounds in Truro
• A complex of six self-catered chalets in Torquay
• A campsite including a restaurant, leisure facilities, shop and a manager’s cottage in Plymouth
• A working farm with a farmhouse, a farmworker’s cottage (occupied by the tenant farmer) and a stone barn near Taunton

I am happy living in my home in London for now, so all of these transactions will be subject to the HRAD (assuming the residential rates apply) and the NRS does not apply.

Scenario 1: Apartment  

As I already own my London home, the HRAD would apply as follows:

If, after holidaying there, I decide I like Poole so much I want to relocate and live in the apartment, I won’t be able to reclaim the surcharge (£30,000) even if I sell my old home within three years as I did not intend the flat to be my home on the effective date.

I could decide to purchase the property via a limited company but the 15% rate would apply unless I purchase it for exclusive use in my rental business. If I were going to use the property personally as well, I would also need to weigh up any additional tax and reporting obligations, for example benefits in kind and the annual tax on enveloped dwellings (ATED), as well as the significant SDLT liability (£150,000).

Scenario 2: Family home with FHL cottage 

As I would be purchasing two dwellings in a single transaction, I can potentially claim MDR as follows:

The ability to claim MDR depends on meeting a number of qualifying conditions. Here, of particular importance will be the question of whether or not the FHL is a separate single dwelling from the main house. Does it have enough facilities, independence and privacy from the main house? Are there any restrictions on its use or sale? A closer look at the facts in light of HMRC’s guidance and Tribunal cases will need to be carried out.

The position here could look quite different if I was planning on living in the main house and replacing my home, or if it was to be my only property. Provided the holiday cottage was worth less than one-third of the total price, the cottage would be a subsidiary dwelling and the HRAD would not apply (total SDLT due reduces to £25,000).  Some independent valuation advice would be helpful here. 

Scenario 3: Six-chalet complex

If there are six dwellings, I can either calculate SDLT using the non-residential rates, or if it produces a favourable result, use the residential rates (HRAD) and claim MDR: 

What if there are any legal restrictions on the use of the chalets? If they cannot be permanently occupied then they are arguably not suitable for use as a dwelling. However, greater weight is generally given to the physical configuration of the property than to legal restrictions. Cases such as Dower illustrate that all these factors still need to be considered in the round and judged together: there may be no straightforward answer.

Scenario 4: Campsite with cottage 

The campsite itself is a commercial enterprise and the inclusion of the cottage will make it a mixed-use transaction. Non-residential rates will apply to the whole consideration and so the liability would be £39,500 as above.

If I was purchasing a large number of static caravans (‘park homes’) with the site that had been permanently affixed to their plots, then I would also need to consider whether these would be viewed as dwellings and therefore, whether MDR could give a better result. If the park homes are chattels then they can be excluded from the consideration subject to SDLT.

If I set up a company to buy the property and business then the 15% rate could apply to the cottage if it has a value of more than £500,000. However, there is a potential exemption for employee related accommodation or a rental business exemption which could apply here.

If I buy the business as a going concern with other assets then a just and reasonable apportionment of consideration will need to be made between property and other assets which do not form part of, or are not inherent in, the land such as chattels.

Scenario 5: Farmhouse with farmworker’s cottage and barn

At the effective date, there are two properties that are suitable for use as a dwelling so MDR could apply, giving a liability of £55,000 as above.

Alternatively, non-residential rates (mixed-use) could apply if there is agricultural land which is used in the working farm (not garden and grounds) and SDLT would be £39,500.

A third option of using mixed-use rates but with an MDR carve-out (i.e. MDR claimed in respect of the part of the consideration attributed to the dwellings) could also be considered.

But what happens if, after completion, the farmer (who continues to run the farm) moves into the farmhouse so I can demolish the cottage and build a luxury FHL and convert the barn?

I have reduced the number of dwellings within three years of the effective date, therefore MDR could be clawed back (Schedule 6B) increasing my overall liability to £71,250. However, if I am able to complete the demolition and rebuild as one ‘event’ within the three-year window, there may be an argument that the clawback should not apply. There is no further relief available for having created an additional property by converting the barn within this period.

It is worth noting that my MDR claim would be unaffected if I sold the cottage to the tenant farmer so that he could redevelop it instead, even if this takes place within the three-year window.

Given the number of rates, reliefs and judgemental areas, it is no wonder that many conveyancers are shying away from giving SDLT advice.

There is a 12-month amendment window for SDLT returns and MDR claims, so all is not necessarily lost if a valid claim is missed, but with significant tax savings at stake on a £1m property purchase it is well worth seeking specialist advice from the outset, giving the buyer peace of mind to enjoy the holidays!

Find out more about PKF Francis Clark’s team of tax specialists.