A recently released consultation paper published by HMRC highlights two areas of the Stamp Duty Land Tax (“SDLT”) regime, which are causing particular compliance problems for tax payers, their advisors and conveyancers. In the paper, HMRC goes as far as saying that an industry of SDLT “reclaim agents” has grown up to take advantage of the uncertainty in the rules, underlining the need for them to be addressed.

Multiple dwellings relief

The first area of concern surrounds multiple dwellings relief (MDR). If more than one dwelling is purchased in a single transaction, this relief allows the SDLT to be calculated based on the average price of each dwelling, instead of the total price. The calculation has the benefit of multiple uses of the nil rate band and the lower rates, therefore having the potential to reduce the SDLT charge considerably.

HMRC believes that the potential for a lower charge to SDLT has led some taxpayers to abuse the relief by interpreting the words used in the legislation – “suitable for use as a dwelling” – widely. There is no definition of dwelling in the law, although there is now a body of case law, and HMRC cites examples of where claims to MDR have been made, including: –

• a typical suburban house where, after the purchase had completed, the buyer claimed that an integral garage, which included a toilet and handbasin, was capable of being used as a dwelling, and so MDR should have been claimed; and
•  in a small, two bedroomed barn conversion, it was claimed post-completion that a utility room with a toilet was suitable for use as a dwelling and that the barn conversion was in fact two dwellings.

One of HMRC’s concerns is where the conveyancing solicitor applies the rules correctly but following subsequent contact from reclaim agents, who often take a more aggressive interpretation of “suitable for use as a dwelling”, the purchaser seeks to make an unjustified negligence claim against the conveyancer.

Although HMRC has achieved some success at Tax Tribunal against MDR claims, the consultation document is seeking views from tax and conveyancing practitioners on ways in which MDR can be applied without interpretation of a dwelling.

HMRC’s suggestions include: –

• allowing MDR only where all or some of the dwellings are being purchased for business use, such as for rental;
• permitting SDLT only where the smaller of the dwellings is relatively large – i.e., to prevent claims for small annexes as dwellings; and
• allowing MDR only for three or more dwellings.

Mixed use property purchases

The second area of concern is mixed-use properties. Under SDLT rules, a property transaction comprising both commercial and residential elements is classed as mixed use, an example being a building with a shop on the ground floor and living accommodation on the first floor, with the SDLT charge being calculated on the lower non residential rates.

HMRC has identified that this can lead to residential property buyers manipulating their purchase to include a “non residential” element, with examples such as: –

• a purchaser leasing their garage as a storage facility to a company, despite the garage being part of their semi-detached house in a residential area, and claiming it was commercial use and therefore the purchase of the whole house was subject to non-residential use
• a purchaser claiming non-residential rates on their house in an affluent area. The property included a paddock in which they allowed a neighbour’s horse to graze.

One option suggested by HMRC is to apportion the purchase price between residential and non-residential to give a fairer result. It also suggests that the mixed-use rate could only apply when the non-residential proportion is substantial to discourage abuse, as in the examples described above.

However this could lead to operational difficulties on valuation – for instance, who would prepare the valuation, and on what basis?

HMRC has also identified that this might have an effect on those business which do have a residential element, such as corner shops, B&B, and pubs.

The closing date for consultation is 22 February 2022 and we can expect to see any legislative changes later that year or in early 2023.

Current SDLT legislation is a complex area that requires experienced navigation and interpretation. We shall be keeping a close eye on developments. In the meantime, for help and advice on SDLT, please get in touch with Fiona Phillips at fiona.phillips@andrewjackson.co.uk.