On 30 November, on what has become known as ‘Tax Administration and Maintenance Day’, the government published a number of tax consultations, including one on stamp duty land tax (shortened here to ‘stamp duty’ for convenience). The 12-week consultation proposes changes to the way in which ‘mixed-use’ transactions and multiple dwelling transactions are taxed. The proposed changes, which are significant, are unlikely to be introduced until autumn 2022.
There are two main alternative sets of stamp duty rates: one for transactions that are exclusively in residential property with a top rate of 17%; and another for transactions that are not exclusively in residential property (or are ‘linked’ to a transaction that is not) with a top rate of 5%.
This hard-edged rule always existed in the stamp duty legislation. It carried little significance for the first nine years of the tax, as the two sets of rates were the same, only the nil-rate tax band threshold was different. However, since 2012 successive governments have increased the rates for residential transactions to a much larger extent than the rates for non-residential or mixed transactions, culminating in a maximum 12% swing.
The problem, aside from the rule’s lack of logic, is the width of the type of cases it affects. A ‘mixed-use’ transaction includes not only the purchase of a single building with commercial and residential use (for example, retail at ground level and flats above), and the purchase of a mixed portfolio of exclusively residential properties and exclusively commercial properties, it also includes the purchase of a dwelling with land that is not ‘grounds’ of the dwelling, as well as the purchase of a dwelling with land that is not residential property regardless of its relationship with the dwelling. These last two possibilities have been exploited by ‘boutiques’ in particular, pushing the boundaries on when adjoining land purchased with a dwelling ceases to be ‘grounds’ and artificially coupling high value residential property with low-value non-residential property in a single sale.
For many years, I and others have wondered why the price payable for a ‘mixed-use’ transaction was not apportioned with each element taxed at the appropriate rates before being aggregated to produce the total stamp duty payable. The government is consulting on doing just that.
Multiple dwelling transactions
In 2011, a partial stamp duty relief was introduced to promote the supply of private rented housing. It works by ensuring that the stamp duty payable on the purchase of more than a dwelling is closer to the amount that would be payable if the dwellings were purchased separately. For the first five years it worked as intended and became an important relief for businesses investing or trading in residential property. In 2016, the 3% ‘higher rates’ were introduced for purchases of ‘additional’ dwellings by individuals.
A government amendment was made to give an exception to the ‘higher rates’ for purchases of dwellings with ‘granny annexes’. The concern was that without it the ‘granny annex’ would count as an ‘additional’ dwelling and engage the ‘higher rates’ regardless of the ownership of other dwellings by the buyer. The exception had the unintended effect of starting a practice of claiming multiple dwellings relief on ‘granny annexes’. If a ‘granny annex’ does not count as a single dwelling then the exception to the ‘higher rates’ would have been otiose. It is responsible for what has become a burgeoning reclaim industry, with ‘claims farms’ offering buyers to reclaim stamp duty by making a retrospective claim for the relief where the buyer is still in time or to bring an action for professional negligence against the conveyancer where the buyer is not in time.
The consultation makes four proposals:
- Allow the relief only where all the dwellings are purchased for a qualifying business use (for example, development and resale or exploitation as a source of rents);
- Allow the relief only in respect of the dwellings purchases for a qualifying business use;
- Allow the relief in respect of annexes only where they are worth at least a third of the total price; and
- Allow the relief only for purchases of three or more dwellings.
If the proposals are acted on, which is virtually certain in my view, the consequences are likely to include:
- The demise of ‘claims farms’;
- Fewer professional negligence actions;
- More complexity for conveyancers;
- Pressure on buyers to obtain valuations to defend apportionments;
- Less case law illuminating the meaning of ‘dwelling’ and ‘grounds’; and
- Pressure on conveyancers to consider the timing of completions/exchanges in the run-up to the changes being introduced.
Obviously, some of these consequences are welcome and the proposals will certainly achieve their objective of reducing the scope for abuse of the rules. But they will also have unintended consequences. The government defended its decision not to introduce reliefs for businesses from the ‘higher rates’ and the increased rates for ‘non-resident transactions’ because of the ‘flexibilities’ given by the ‘mixed-use’ rule and multiple dwellings relief.
By ensuring that businesses always pay the ‘higher rates’ and increased rates for ‘non-resident transactions’ on the residential element of a ‘mixed-use’ transaction, this does sound like a U-turn. The consultation gives an opportunity to minimise the effect of the changes on businesses.
Conveyancers should be aware of the potential changes, advise buyers that might be affected and put in place controls to ensure that the changes are taken into account when calculating the tax.
Sean Randall is a partner at Blick Rothenberg, London