HMRC Stamp Duty Crackdown - more experts warn of problems

Yesterday we reported on how the Chartered Institute of Taxation was warning of problems with new HMRC stamp duty rules to crackdown on avoidance - and now more experts have expressed their concern.

The Association of Taxation Technicians says it’s supportive of HMRC’s plan to crack down on SDLT tax avoidance when people buy residential property. 

But the ATT is concerned that HMRC’s proposals to tackle one aspect of the problem will add uncertainty for the purchaser about final purchase cost, complexity that affects both sellers and buyers and could delay the buying process - as well as resulting in increased SDLT bills.

At present purchases of mixed-property - for example a country house with some land let for grazing, or food shops with flats above, or some pubs and Bed & Breakfast homes combined with workplaces - are wholly charged to the non-residential rates of SDLT, which are lower than the residential rates.

This is currently the case even where only a small proportion of the property is non-residential in nature. And it gives individuals purchasing residential property a strong incentive to argue that part of the property such as a field or large garden are in fact non-residential. 

HMRC has successfully challenged a number of claims of this nature in court. So to counter further tax abuse, HMRC is suggesting apportioning the tax for a mixed-use property: meaning residential rates of SDLT paid on residential land, and non-residential rates of SDLT paid on non-residential land.

“We agree that the proposal will target the particular abuse that HMRC are concerned about, but buyers of mixed-use property should prepare themselves for additional costs and complexity. The proposal will have a wider effect on businesses in particular, and not just individual residential transactions where the majority of abuse is occurring” cautions Jon Stride, co-chair of the Association of Tax Technicians Technical Steering Group.

“For example, the plans for apportionment may result in unfairness where the residential element is small, but the overall transaction figure is large, because the rates of residential property are so much greater once the total proceeds exceed £925,000” he adds.

“Apportionment is likely to increase SDLT on the residential elements of a mixed-property because residential SDLT rates are higher, and there is increased likelihood of higher rates of tax for additional dwellings. This will increase costs for some businesses including purchasers of pubs, shops with flats, or farms where the purchase includes a farmhouse or cottages.

“The process of establishing the necessary value is likely to increase costs and complexity. Where tax depends on the apportionment, the increased uncertainty over the SDLT figure at the start of the process may affect buyers if the final apportionment results in a charge significantly greater than that budgeted for. 

“Given that valuation is an art as much as a science, should HMRC enquire into an apportionment and take a different view, there is a risk of additional SDLT and penalties because of disagreements over valuation.”

The ATT warns of increased complexity for conveyancers. This may increase the need for a property tax professional to be involved now and introduce delays because of the need to obtain valuations. 

There is also the likely impact on the mortgage application process if the SDLT figure is larger than expected and additional finance is required.

You can see our story from yesterday, on the concerns of the Chartered Institute of Taxation, here.