Property purchasers and investors need to understand the unintended implications of Stamp Duty Land Tax with the possibility of paying a 3% additional SDLT in the UK. Multiple Property owners, buy to let landlords, second homeowners, overseas holiday home buyers need to be well advised. What has astounded me is the number of transactions that this additional tax is now possibly payable on, the tax is in practice much more wide-ranging than originally contemplated. It is ironic that in an attempt to improve the home-buying process this legislation actually makes the process more complicated, drawn out and torturous. Clients and Solicitors need to be aware of the potential pitfalls.
Stamp duty is, I believe, the oldest tax payable dating back hundreds of years. After the consolidation of Acts by the Stamp Act of 1891 payment of stamp duty on residential property transactions was relatively straightforward, duty was payable on properties over a certain threshold at a flat rate of 1% of the purchase price. The thresholds seldom changed and it is only in recent times that various Chancellors have started to chop and change the thresholds, the percentage of the duty and even to change the stamp duty system.
The most significant change was the introduction of the stamp duty land tax (SDLT) on the 1 December 2003. For practising conveyancers this involved a substantial change in their conveyancing methods as it required the completion of a lengthy form which had to be signed by the purchaser. Initially, this form could not be submitted online. With the introduction of SDLT it became a personal tax and the solicitor completed the form on behalf of their purchasing client who became liable to pay the same. The tax was then paid, normally by cheque, by the acting solicitor and the form was submitted to Her Majesty’s Revenue and Customs (HMRC), either in person (until the Stamp Office was closed in Belfast) or by post or DX.
This change was the most significant change to the system since 1891 and it required the purchaser’s solicitor to undertake considerable additional work on behalf of HMRC in completing the forms which contain a great deal of information and to have the same agreed and then executed by their clients. I do not recall there being any forewarning or trial periods put in place prior to this significant change arriving.
In Reg Nock’s excellent book entitled Stamp Duty Land Tax “A Practical Guide” (published by the Law Society of England & Wales) he refers to this change as being ‘rushed into legislation after several previous legislative failures, to block simple Stamp Duty mitigation arrangements’.
He also states that SDLT ‘is very different from Stamp Duty not merely as regards enforcement and compliance but also as regards its nature and scope. It is a fundamental error to regard SDLT as simply Stamp Duty as SDLT form 1 replaces the old PD forms and it is different from Stamp Duty in many ways.’
Since the introduction of SDLT solicitors have adapted to this new regime and the majority of solicitors now complete their forms online. In the Law Society of England and Wales Law Gazette Edition of the 15 August 2016, it would appear that HMRC is now considering introducing a penalty for solicitors and conveyancers if they do not file the SDLT returns online. HMRC is also considering reducing the time period for payment of the SDLT from 30 days to 14 days. Again this will put a lot more pressure on firms particularly those that still do not complete the form online.
My recollection from 2003 was that the adjustment to the SDLT forms was challenging and I can remember a few occasions forgetting to get the purchaser client to sign the forms and having to arrange for this to be done and the SDLT to be paid within the given time frame. Apart from this, once the system bedded in it worked relatively well but this was still a significant increase in the required workload.
Successive Chancellors, faced with a rising market, started to tinker with the SDLT thresholds to boost the Treasury coffers. Also there were rumours at the time that other European jurisdictions would substantially increase their thresholds to between 5-7%, this pattern was followed by our Treasury. In doing so they introduced a number of different levels of SDLT. The old system of 1% was changed and SDLT payments could amount to 3 or 4%. However fundamentally the system did not change and apart from these thresholds creating problems in the market again the system worked relatively well. Provided your systems were in order, and you were proactive in advising the client of the duty that was payable and when it was payable then there were no major issues during this period.
In fact, as solicitors developed a more online approach to both the completion of the SDLT form and e-registration of the Title post completion the system became less onerous. The requirement for the purchaser client to sign the form was changed as HMRC welcomed electronic versions of the form. Firms started to move away from insisting upon their purchaser client signing the form and just submitting the form online based on the information surrounding the transaction. Again not many problems arose as a result of this change and, if anything, it speeded up the post-completion registration formalities.
This was particularly assisted by HMRC allowing the issue of the SDLT Certificate prior to payment of the duty. The speed at which the Certificate could be issued allowed the solicitor to submit the application for registration at a time much closer to completion than under the old system. This, therefore, reduced the risk to the purchaser’s solicitor of a charge being registered prior to their registration of their client’s Title.
Similarly, e-registration in the Land Registry, on the whole, has been of assistance in speeding up post registration formalities. Speed is crucial now for all purchasers’ solicitors particularly acting for lenders who require registration formalities to be completed within three months of the completion date.
In the November 2015 Autumn Statement, the headline announcement was the proposed introduction of a SDLT charge of a 3% additional tax, to be imposed on those purchasers who had ownership of multiple properties. The thrust of the PR surrounding this announcement was an attack on all landlords who owned more than one rented property. There were other changes to be introduced to penalise those landlords because apparently large numbers of people could not afford to buy their own homes. Like many of the Chancellor’s pre-budget announcements they are soon forgotten about, until the relevant budget that may introduce these proposals arrives. I noticed the change in the residential market around February of this year. A few Estate Agents had contacted me to say that their client’s offer was subject to the transaction completing by the 1 April 2016, to avoid the possibility of paying a 3% additional SDLT. This additional tax was possibly going to be imposed on the t April 2016 on any property with a value of more than £40,000. It is additional to any other SDLT that may be payable on the property. It is therefore a very substantial additional tax.
As the Budget of the 18 March 2016 loomed more and more transactions were agreed with a condition that the completion must take place prior to the 1 April 2016. This started to put enormous pressure on all residential conveyancing practices in Northern Ireland. One colleague in early April described the fiasco as worse than anything he had experienced during the peak of the property boom in 2006/2007. I agreed with him because of the concentration of transactions that required to be completed within such a short period of time. The worst example of this was in connection with a purchaser’s solicitor providing me with a contract on the 31 March which we had to complete on that date and to which the transaction had only been agreed about ten days before. The risks being taken during this period by purchasers and their solicitors were enormous.
What also added to the difficulty was the short period of time between the 18 March 2016 Budget which confirmed the introduction of the 3% additional tax and the 1 April. Also with the Saint Patrick’s Day Bank Holiday and Easter there were approximately six to seven working days to complete transactions before the deadline of the 1 April.
What was also extremely frustrating was the complexity of the new 3% additional tax; HMRC published a guidance note with a number of questions and answers to the rear of the document. This was of some assistance to both practitioners and their concerned purchasing clients. Prior to the 1 April, the mantra was complete to avoid any risk of paying the 3% additional tax. After the 1 April more significant problems began to manifest themselves.
What has astounded me is the number of transactions that this additional tax is now possibly payable on. I have not yet had to act for a buy to let landlord with multiple properties purchasing another property to add to his vast portfolio and hence pay the 3% additional tax. However, I have had numerous people who have second homes or apartments either because they have been unable to sell them in a recessionary market or for other reasons and are having to contemplate having to pay an additional 3% tax in circumstances they feel quite unjustified.
The first injustice that our clients complain about is the fact that some of these properties are not in the UK. We have had clients who have purchased in Europe or further afield and because of this property ownership outside the UK tax system, they now have to pay an additional 3% tax on the purchase of an asset in the UK.
We have had other circumstances where in acting for couples one of the parties was in a previous relationship and was hence a co-owner of another property. For various reasons the other property has not sold and in these circumstances, the 3% additional tax requires to be paid, but may possibly be reclaimed if the other property is sold within three years of the completion date.
Prior to 2013 very occasionally if I had a complicated SDLT issue I would write to the Stamp Office in Birmingham asking for some guidance. After some weeks I would normally get a response. With the closure of the Belfast Stamp Office there does not appear to be anywhere a solicitor can seek guidance on a SDLT issue apart from writing to the Birmingham Stamp Office. Since the 1 April I have written on a number of occasions. I have received a response which has normally been satisfactory but the response takes on average about two-three months to arrive. Enquiries I am raising I cannot find the answer to online as the circumstances I believe have not been contemplated.
This has a knock-on effect on the residential market as the purchasers may not be able to raise the 3% additional tax which they thought they would not have to pay, and therefore are not prepared to commit to purchasing a property which they had originally agreed not realising that the surplus tax is payable. In one particular transaction, it took three months for a response to an inquiry raised with the Birmingham Stamp Office. The purchaser then had to raise and pay the 3% additional tax not knowing whether they would be able to reclaim this. After they completed we received a favourable response and the purchasers will be able to recoup this 3% additional tax.
What has aggrieved the profession in Northern Ireland is the lack of information and assistance from HMRC. What many of my colleagues believe is that there is a failure to do a detailed impact assessment of the additional tax to substantiate if the tax is much more wide-ranging than originally contemplated. I have noticed an incredible amount of circumstances where the potential to pay the additional tax has arisen since the 1 April. Not only does it put an extra burden on the purchasers but also on the solicitors’ firms they instruct.
Post Brexit the market is likely to be effected by a lack of confidence and uncertainty. This uncertainty will be compounded by this additional tax. The Society of Licensed Conveyancers has recently called for the scrapping of the SDLT and their Chairman stated as follows ‘Stamp Duty Land Tax is perhaps the most inaccurately named tax in existence. There is no stamp involved, it is not a duty, and it is not assessed on property value rather than land. In fact the word that is in any way accurate is Tax. In reality, SDLT is a direct property transaction tax.’
The Chairman went on to say ‘It is ironic that the Government is engaged in a review to improve the home-buying process when it has introduced legislation that actually makes the process more complicated and torturous. It is an insult on top of this that HMRC looks to conveyancing lawyers to act as Tax Collectors’.
I recall one of my colleagues who had multiple completions on the 31 March 2016 advising me that he had to arrange for all his staff to come in at 7am and leave at 7 pm in order to complete the various transactions by the deadline, saying to me that this disaster has been ill conceived poorly planned and is quite simply a ‘A perfect storm’.
This article appears in full in the November print edition of the Folio Magasine.