My VIP Tax Team question of the week: SDLT on acquisition of a dwelling by a property trader

Q. My client, a company has purchased a residential property from an estate and claimed relief for Stamp Duty Land Tax (SDLT). They now wish to rent the property out. Would this negate the SDLT relief that they obtained on the purchase? If they create a subsidiary company and transfer the property there and claim group relief before renting it out, would this prevent the withdrawal of the relief they originally claimed?
 

A.) All references below are to Finance Act 2003 (“FA 2003”) unless stated otherwise.

The acquisition of a dwelling by a property trader from the personal representatives of a deceased individual is exempt from an SDLT charge provided that the relevant conditions are satisfied, and a claim is made. The relief must be claimed in the land-transaction return (Form SDLT1) at Box 9 using Code 08.

The definitions and conditions for the relief are outlined in Schedule 6A FA 2003, starting at Paragraph 3.

The first issue to consider is whether your client falls within the definition of a property trader under Paragraph 8. A property trader can include a company, a limited liability partnership and an ordinary partnership where the partners are company or other limited liability partnerships that carries on a business of buying and selling dwellings. Importantly, the legislation does not specify whether the entity can carry on another business but as we will see below, the entity can undertake another business.

Secondly, a property trader can only claim the exemption under Schedule 6A if the other conditions in Paragraph 3 (2) outlined below were met.

The conditions are:

(a) that the acquisition is made in the course of a business that consists (emphasis added) of or includes acquiring dwellings from personal representatives of deceased individuals,

(b) that the deceased individual occupied the dwelling as his only or main residence at some time in the period of two years ending with the date of his death,

(c) that the property trader does not intend–

(i) to spend more than the permitted amount on refurbishment of the dwelling, or

(ii) to grant a lease or licence of the dwelling, or

(iii) to permit any of its principals or employees (or any person connected with any of its principals or employees) to occupy the dwelling, and

(d) that the area of land acquired does not exceed the permitted area (defined in Paragraph 7).

Broadly, the definition of permitted area is borrowed from the one applied for Principal Private Residence relief for Capital Gains tax purposes- i.e. up to 0.5 hectare (including the house) or a larger area where it is required for the reasonable enjoyment of the house.

Partial relief is available where the grounds or gardens are larger than the permitted area.

If all the conditions above were met at the time of the purchase, the transaction would have been exempt from an SDLT charge. Equally, if the conditions were not met, SDLT should have been paid by the client.

If the company now wishes to rent the property, this will breach the condition in Paragraph 3(2)(c) and the relief will be withdrawn. The legislation makes provision for withdrawal of the relief in Paragraph 11 (3) and where relief is withdrawn, the amount of tax chargeable is the amount that would have been chargeable in respect of the transaction but for the relief- Paragraph 11(6).

A land transaction is exempt from charge if the vendor and purchaser are companies and at the effective date of the transaction, are members of the same group. In this case, the transfer to the subsidiary would ordinarily qualify for SDLT group relief outlined in Schedule 7 FA 2003.

If your client company sells the property to the subsidiary, seemingly the initial relief obtained may not be withdrawn under Paragraph 11 (3). Alternatively, if the property is otherwise transferred, it is likely that relief will be withdrawn, although the legislation is ambiguous on this issue. In either case, group relief will be denied because the transfer would not be effected for bona fide commercial reasons and seemingly, forms part of arrangements of which the main purpose, or one of the main purposes, is the avoidance of liability to tax (Schedule 7 Paragraph 2 (4A)). In addition, the SDLT legislation also contains a broad anti-avoidance provision in Section 75A FA 2003 which HMRC may argue applies in this case.

HMRC’s guidance on the relief in Paragraph 3 Schedule 6A can be found at SDLTM21000, specifically at SDLTM21040.

 

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Tax Adviser
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Prior to joining the team, Ibrahim worked in boutique wealth and tax advisory firms where he dealt with owner-managed businesses and high net worth individuals. He also spent over three years managing the operations of a leading fiduciary firm in Cyprus, specialising in offshore trusts. Ibrahim is a member of the Association of Tax Technicians and is a qualified Chartered Tax Adviser.

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