Tim Palmer and Mark Rubinson of Arram Berlyn Gardner review the stamp duty land tax traps when a company acquires residential property, including multiple practical examples to illustrate.
For companies that bought a house or flat before 8 July 2020, or indeed acquire one after 31 March 2021 (ie, that don’t benefit from the temporary SDLT holiday), there are three different situations:
1 Company buys a house or flat for a cost of up to £500,000
|
Band (£) |
Rate |
|
0–125,000 |
3% |
|
125,001–250,000 |
5% |
|
250,001–500,000 |
8% |
The table above includes the 3% surcharge for these companies when they buy a house or flat costing up to £500,000.
2 Company buys a house or flat for more than £500,000
The special 15% rate applies to the entire consideration.
3 Company buys a house or flat for more than £500,000, but qualifies for a relief
The increased 15% SDLT charge does not apply if the company qualifies for various reliefs, including:
- The letting of the property for rents, in the course of a qualifying property rental business.
- The redevelopment and resale of the property in the course of a property development trade.
- The occupation of the property by certain qualifying employees of the business.
- The acquisition of the property under a regulated home reversion plan.
- Making the property available to the public for at least 28 days a year.
- A financial institution acquiring the dwelling in the course of lending.
- The acquisition by a flat management company for occupation by a caretaker.
- The purchase of a farmhouse for a farming trade.
The appropriate tax legislation must be reviewed to see the full and exact requirements to obtain the relief.
The following rates of SDLT will apply if the company qualifies for one of the above reliefs:
|
Band (£) |
Rate |
|
0–125,000 |
3% |
|
125,001–250,000 |
5% |
|
250,001–925,000 |
8% |
|
925,001–1.5m |
13% |
|
Over 1.5m |
15% |
The 3% surcharge also applies to this third category.
In order to pay the lower rates of SDLT (and not purely the 15% rate), the company must purchase and use the property exclusively for one of the above qualifying purposes. This is a requirement specified in Sch 4A, Finance Act 2003 (FA 2003). It is not a ‘main purpose test’.
Additionally, the company must meet the above ‘exclusive use test’ for three years following the purchase of the property. If it does not, then the 15% rate of SDLT will be payable retrospectively.
HMRC is notoriously strict concerning the company’s use of the property after purchase.
Example
X Ltd acquires a flat costing £800,000 for use by a qualifying property rental business on 1 February 2021.
For the next three years, it must be let to a third party on a commercial basis. It must not be occupied by anyone connected with the owner.
For the remainder of 2021 and 2022, it lets the property out to an unconnected third-party tenant.
However, from January 2023, the company lets the owner’s son live there for six months. This will blow it and cause a retrospective 15% SDLT liability on the company.
This additional SDLT will be payable within 14 days from the issue of the appropriate SDLT assessment by HMRC.
You look at the use of each property separately.
This 15% SDLT liability is a massive extra cost for the company. If possible, it must be avoided. Clients must also be advised about its existence, educated, and the appropriate SDLT planning undertaken.
Consultus Care and Nursing Ltd v HMRC [2019] UKFTT 0437 (TC)
The company carried on a business of supplying and providing carers to elderly patients (their clients) at their own homes.
The company provided training courses for the new carers. The company owned a domestic property that it let to the new carers for two or three days while they were attending their induction course. Sometimes, new carers from abroad joined the company and stayed there a bit longer until they had found their own permanent accommodation.
While the carers were staying in the property, the company supplied them with breakfast and fresh bed linen in return for the rent, which each carer paid to the company.
The company acquired a second house for £930,000 in December 2015. The company claimed relief under para 5(1)(a), Sch 4A, FA 2003. It did not feel that all the consideration of £930,000 was entirely liable to SDLT at 15%. The company claimed that it had acquired the property exclusively for the exploitation as a source of rents in the course of a qualifying property rental business.
HMRC enquired into the company’s SDLT return. HMRC did not accept the company’s relief claim. HMRC altered the SDLT return, denied the company the SDLT relief and demanded an extra £102,750 of SDLT.
HMRC denied the SDLT relief for two reasons.
- The domestic property had not been acquired exclusively as a source of rents, but it had been bought to enhance the business of providing carers. It assisted the provision of training courses for the business.
- The exploitation of the domestic property did not comprise a qualifying property rental business. It was acquired to assist the company’s trade of providing carers.
The judge stated that to obtain the SDLT relief, the property must have been acquired exclusively for one of the purposes of para 5, Sch 4A, FA 2003.
The judge felt that the company acquired the property both to obtain rent and also to assist the training of the new carers in the company’s ‘provision of carers’ trade. Accordingly, it did not qualify for the relief from the 15% rate and the £102,750 SDLT was payable.
The property was not used exclusively as a source of rents.
Even though she didn’t have to, the judge commented on whether the company had been carrying on a qualifying property rental business. She felt that it had not. The provision of accommodation at the house was part of the company’s business activity of providing carers to elderly clients and the training services to the carers.
The company did not carry on both a trade and a separate property rental business. Accordingly, the company was not therefore carrying on a qualifying property rental business to obtain the SDLT relief.
Temporary reduction of SDLT for companies up to 31 March 2021
These are the rates and bands for the three situations during the temporary SDLT holiday up to 31 March 2021:
Category One
|
Band (£) |
Rate |
|
0–500,000 |
3% |
Category Two
All consideration still chargeable at 15%.
Category Three
|
Band (£) |
Rate |
|
0–500,000 |
3% |
|
500,001–925,000 |
8% |
|
925,001–1.5m |
13% |
|
Over 1.5m |
15% |
Final thoughts
It is worthwhile for companies to take extreme care to make sure that they qualify for the appropriate SDLT relief when they acquire residential property, and continue to meet the legislation’s stringent requirements for the next three years of ownership.
About the authors
Tim Palmer CTA ATT is a Tax Consultant at Arram Berlyn Gardner
Mark Rubinson FCCA is a Partner at Arram Berlyn Gardner