A widespread underappreciation of the complexity of Stamp Duty Land Tax (SDLT) law has resulted in a deluge of UK citizens making overpayments to HMRC. This has left the firms that advised them exposed to both financial and reputational liability risks. David Hannah, Principal Consultant and Founder of Cornerstone Tax, speaks on how SDLT could be the biggest financial consumer issue since PPI and the types of cases Cornerstone Tax often sees.
The SDLT tax has supposedly raised an extra £2 billion in tax for the government, but how much of that is due to overpayment? David discusses below the issues behind overpayment and how clients receiving the wrong advice can quite literally cost them.
For those who aren’t familiar, SDLT is the fixed tax paid by property purchasers in England, Wales and Northern Ireland. Changes were made to UK SDLT rates in 2014, of no tax on residential purchases up to the value of £125,000, 2% tax for purchases between that and £250,000, 5% in the band up to £925,000, 10% between that and £1.5m and 12% for everything over. Rates for Mixed Use and Commercial Properties were, and remain, much lower.
The changes to the tax have been one of the many factors associated with the slowing of the UK housing market since the changes were made. This hasn’t come as a surprise to the property industry, as the most recent revisions applied increased financial pressure to those looking to buy, particularly first-time buyers who now have to save more cash to pay their SDLT, in addition to their deposit.
What nobody expected, was for confusion to have been quite so rife among agents, solicitors, lawyers and portfolio managers. However, they are not to blame. SDLT has been subject to more alterations since its inception in 2003 than any other comparable tax and certainly its predecessor – Stamp Duty. The legislation governing it is full of exceptions, exemptions and reliefs covering the vast variety of property types and property buyers in the United Kingdom. Many professionals advising buyers are not trained to differentiate between a residential and commercial property for the purposes of SDLT calculation but, rather, use a common sense approach that frequently leads to errors. For anyone who isn’t a dedicated expert in SDLT, this confusion is understandable, and is least understood among the taxpaying general public who are unaware of the various reliefs and pitfalls in the detail of the Tax.
Over the last 12-months, Cornerstone Tax has been piloting an SDLT review and reclaim service, which recently converted into a permanent stand-alone division, SDLT Refunds. It has converted more than 95% of the applications pursued and the average applicant has received more than 50% of their original stamp duty paid. With 2015-16 SDLT revenues in the UK recorded at £10.7bn, this leaves possible annual overpayments projected at more than £3bn across the UK.
This is not a loophole. Purchasers have overpaid SDLT under the instruction of their advisers throughout the purchasing process. The two examples that follow are real client cases that Cornerstone has worked on, with only the names of refund applicants changed for privacy.
The First Time Buyer
Mr A. was buying his first flat in his sole name, with his girlfriend named as a guarantor and borrower on the mortgage. He was incorrectly advised by his solicitor that, as his girlfriend already owned a separate property, he was liable for the custom 3% surcharge. This gave him a tax bill on his first home of £14,000. Mr A. solicitor had, albeit unknowingly, advised him incorrectly because he believed that somebody who was a joint borrower had an ‘interest’ in the property. Since Mr A's girlfriend, who was the joint borrower, had another property the solicitor incorrectly identified that that meant that Mr A. was liable for the 3%. This is a common misconception, that being on the title or indeed being on the mortgage means that you have an interest in the property. It was this fundamental misunderstanding that created the liability to tax which was not actually there. Mr A’s correct tax bill was in fact £5,000 - a difference of £9,000.
The High Net Worth
Mr K. bought a property in August 2014 for £4,250,000. He was advised by his solicitor that the property was wholly residential and paid HMRC £297,500 in SDLT. Having discussed this with his accountant in July 2017 (almost 3 years later), it came to light that Mr K. should have only paid £170,000 in SDLT. This is because the property came with additional land, that qualified it as mixed use under SDLT law and not wholly residential. When Mr K’s situation was explained to HMRC, he was awarded a refund of £127,500 (plus interest).
If successful SDLT refund applications continue to grow at their current trajectory this could be the biggest financial consumer issue since PPI. What is most alarming is the confusion that has clearly been rife among third party advisers; companies who are committed to offering their clients sound and reliable advice. Many of the cases to date demonstrate a reliance in-house among firms on property law experts advising on SDLT, rather than tax experts.
During what is, for many people, one of the most important financial decisions they will ever make, due diligence is owed by service providers who profit from advising them. While almost certainly not deliberate, the fact that so many professionals in the property and legal sectors have fallen foul of the complexities raises serious concerns about the exposures that companies have potentially left themselves vulnerable to. Similarly, HMRC has clearly not done enough to provide the clarity or resources needed to avert overpayments.
Refunds of SDLT can be claimed up to four years from the point of completion on a property. Without swift action from all sides to ensure that a culture of prevention is fostered and historical errors openly addressed, it will soon become a cross-industry battle to avoid the finger of blame being pointed by those who have paid a large amount of tax that was never owed.
David Hannah
Consultant and Founder
As a chartered accountant and chartered tax adviser David is one of the most respected commentators in the UK on tax matters, often quoted by the financial and property press, and consulted by accountants and tax counsel alike. David’s encyclopaedic knowledge of the UK tax legislation is matched to a commercial brain that allows him to see practical solutions to any problem he is presented with.
In a decade of dealing with clients’ tax matters, Cornerstone has emerged as the leading authority in the sector, powering solutions for clients and the industry. Our international reputation for quality, concise advice, which can be trusted is second to none.
