Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland drafted this discussion paper to examine the complexities of the UK’s stamp duty land tax (SDLT) regime, which applies in both England and Northern Ireland.

This paper was prepared in advance of the joint workshop with the Office of Tax Simplification (OTS) to discuss UK tax complexity. SDLT has been chosen by the Committee as one of its two topics of the four topics for discussion at the workshop because not only has this legislation become increasingly complex over the last few years, but its complexity – and thus, its impact – is widely felt across the UK by both tax and legal professionals, and businesses and individuals.

The comments, observations and recommendations made herein are based both on feedback received from members of the NI Tax Committee and the wider membership of Chartered Accountants Ireland.

UK devolved regimes

It should be noted that this discussion paper does not examine in detail the additional complexities that arise from the existence of the two other devolved stamp taxes regimes in the UK, which apply in Scotland and Wales. In Scotland, the land and buildings transactions tax took effect from 1 April 2015 with the land transaction tax commencing in Wales from 1 April 2018.

The existence of three different sets of rules for transactions in England and Northern Ireland, Scotland and Wales in itself results in a high level of complexity, which is a particular concern for conveyancers across the UK who are often required to deal with conveyancing transactions that have differing and complex sets of rules depending on which of the three different UK regimes the land or property is situated in.

This paper also does not examine the administrative complexities of filing SDLT returns and paying SDLT. The administration of taxes in the UK, including filing and paying for individuals, is examined in a separate discussion paper.

Stamp duty land tax – history

In 2018/19, HMRC collected £622.8 billion in taxes. Of that amount, £11.9 billion in SDLT was collected which comprises just under 2% of total tax receipts collected by HMRC.

SDLT was introduced in the UK by Finance Act 2003 and applies to UK land and property transactions from 1 December 2003. As set out above, SDLT only applies to land and property transactions in England and Northern Ireland.

When first introduced in 2003, the SDLT code was a relatively neat set of tax legislation. Although the legislation has always contained a layer of complexity, particularly where SDLT reliefs are relevant in a merger, acquisition or reorganisation scenario or where anti-avoidance legislation is applicable, the rules were, until recent years, well understood with simple calculations and few rates applying.

And, while it may be argued that SDLT returns themselves are not always suitable for particularly complex land and property transactions, the legislation broadly read as a coherent code, with a single rate of SDLT applicable to commercial/mixed use transactions and a single rate applicable to residential transactions. The single rate system was sometimes referred to as the “slab” or “flat rate” system.

The introduction of SDLT in 2003 was followed by a serious of piecemeal patches, amendments, changes and the introduction of additional rates of tax and differing regimes. This has resulted in schedules to Finance Act 2003 as far as 4A, 4ZA and 6ZA being added to this area of UK tax code.

Stamp duty land tax – sequence of recent changes

In recent years, SDLT legislation has therefore developed into an extremely complex tax, particularly in respect of residential property transactions. Some of the specific changes are dealt with in more detail later, where these have resulted in a particular level of complexity for taxpayers and their advisers.

The sequence of some of the most significant changes can be summarised as follows:

• From 22 March 2012, the introduction of a 15% flat rate of SDLT for the purchase of high value residential properties of £2 million or more by certain non-natural “persons”;
• From 20 March 2014, the threshold for the 15% flat rate of SDLT to apply was reduced to £500,000;
• From 3 December 2014, the change in the calculation of SDLT for residential properties from the easy-to-use flat rate system to the more complex “banding” regime;
• From 1 April 2016, the SDLT percentage rates charged for additional residential property acquisitions are each subject to an additional 3% SDLT surcharge at each banding level;
• From 17 March 2016, the calculation of SDLT for non-residential (commercial and mixed use) properties also moved to the more complex banding regime;
• From 17 March 2016, changes to the calculation of SDLT on the premium for annual rents where the premium is under the £150,000 non-residential threshold;
• From 17 March 2016, the introduction of a 2% SDLT rate on the slice of commercial leasehold rent transactions where the net present value of the rents is above £5 million; and
• From 22 November 2017, the introduction of first-time buyer’s relief, which is also calculated under a banding regime.

The above summary is just a flavour of some of the most complex major changes and does not deal with the complexity that arises from changes announced on Budget day, which were not previously subject to consultation and the anti-forestalling legislation which surrounds such changes.

The calculation method

Although there had been numerous changes in the rates of SDLT from its initial introduction in 2003, until 3 December 2014 SDLT was calculated as a single flat rate percentage depending on the band into which the relevant consideration, in money or money’s worth, fell.

From 3 December 2014, the calculation of SDLT was changed to become a slicing or “banding” regime, firstly for UK residential land and property. This means that the calculation of SDLT payable can now be comprised of several distinct slices with a different percentage rate applying to the relevant slice falling into each rate band.

If the transaction is the grant of a new leasehold interest, additional complexities also arise which require the SDLT to be calculated on both the premium element (under the aforementioned banding system) and the element of the net present value of the lease rentals in excess of the relevant 0% threshold.

High value residential properties

The 15% SDLT flat rate for high value residential properties purchased by non-natural persons applies where the high value residential property is acquired, broadly, by a company, collective investment scheme or a partnership with a member who is a company or a collective investment scheme (i.e. where the property is “enveloped” within these structures).

The introduction of this flat rate in 2012 was part of a wider series of measures as part of the UK Government’s move to deter the “enveloping” of high value UK residential property. This, coupled with the extremely complex annual tax on enveloped dwellings (ATED) regime, which also applies to such high value residential properties, has proven to be a very difficult, complex and challenging area for UK tax professionals and advisers.

In addition, both the rules for the 15% flat SDLT rate and the ATED regime include a number of complex reliefs, exemptions and administrative requirements.

The threshold for the 15% SDLT flat rate was also amended just two years after it was first introduced and the ATED regime has been subject to numerous changes since it was first introduced in 2013, with major changes introduced from April 2019 as a result of the revamped non-residents capital gains tax regime.

In the context of tax receipts of just £139 million in 2018/19 from the ATED regime (just 0.22% of total tax receipts in 2018/19) and tax receipts of £105 million in 2017/18 collected from properties subject to the 15% flat SDLT rate, it is clear that the complexity of both these regimes results in nothing more than a very small tax take for the UK Exchequer in the context of total receipts. The level of complexity is clearly disproportionate.

Residential properties’ additional 3% surcharge

This was introduced from 1 April 2016 and formed part of the UK Government’s so-called ‘Five Point Plan’ for housing set out by the then Chancellor of the Exchequer in the 2015 Autumn Statement. The policy intention behind the additional 3% surcharge, as set out in the original consultation paper of 28 December 2015, was about “supporting home ownership”.

The premise of the measure was that the surcharge would act as a disincentive to those buying property for investment, thus resulting in more purchases by owner occupiers. The consultation paper predicted that “the vast majority of transactions, such as first-time buyers purchasing their first property or home owners moving from one residence to another to another will be unaffected.” This has not been reflected in the experience of taxpayers to date.

The most recently published SDLT receipts for Q3 2019 show that 45% (£1,057 million) of residential receipts for SDLT were from higher rate transactions, of which £505 million is estimated to be from the additional 3% rate. The level of residential receipts from transactions liable to the higher rates therefore suggests that the policy is not achieving its original goal. This is further supported by the subsequent introduction of first-time buyer’s relief in November 2017, which was also designed to encourage purchases by owner occupiers.

The policy design of this surcharge is also extremely complex, and the original legislation had to be amended in both the Finance Act 2018 and Finance Act 2019.

The criteria used to determine if a property acquisition is subject to the additional 3% surcharge has several differing rules which apply to acquisitions by individuals, joint purchasers, married couples/civil partners and companies. This complexity, in some instances, may lead to the additional 3% incorrectly being applied to avoid a potential underpayment, interest and penalties. In addition, these rules effectively treat a married couple as a single person.

The legislation also does not cope well with replacement dwellings. Homebuyers may be caught out when buying a home to live in when they own another property, perhaps one they have never used as their main residence. HMRC’s online SDLT calculator simply asks: “Is the property being purchased replacing your main residence?” This is misleading, as it fails to give any indication that to correctly answer “Yes”, there must be a disposal of a previous home used as their main residence.

It is also very unfair that the rules require existing home owners to pay the additional 3% when they buy a new home before selling their old one. Although the additional 3% surcharge can be refunded if the old home is sold within three years, this can lead to problems financing the additional 3% upfront. The Q3 2019 statistics set this out in stark detail: “In Q3 2019, 5,700 additional dwellings refunds totalling £77 million were paid.” This is in one quarter alone.

When applying for a refund of the additional 3% within the 36 month time window, HMRC’s online application form does not clearly set out what is needed to qualify for the refund and does not explain the condition that the person applying for the refund must have lived in the old home as their only or main residence at some time in the three years leading up to the purchase of the new home.

The impact of complexity

As a consequence of these complexities, tax and legal professionals now need to ask myriad questions of a purchaser in order to be able to calculate the SDLT liability due. There are several potential rates, rules, and calculations of SDLT that must be considered, and which can now apply to a transaction, which include the following:

• The differing rates and calculations for non-residential and residential freehold and leasehold properties;
• The 15% higher rate for high value residential properties and the resultant impact of the ATED regime;
• The additional 3% surcharge and the rules and guidance around replacing a property/delay in selling a main residence/refunds for overpayments; and
• The potential for first-time buyer’s relief.

Advisers also need to consider the possibility of exemptions, reliefs and anti-avoidance rules, which may apply to some or all of the transaction. Further complexity is added when applying certain reliefs, such as multiple dwellings relief and the various SDLT reliefs that are available in a reconstruction scenario.

Legal professionals and conveyancers, who are not tax experts, often need to take advice from a tax professional to navigate this complex legislation. This complexity is often disproportionate to the amount of tax at stake, and unfair outcomes can arise for both the taxpayer and HMRC. Overall, as SDLT comprises £150 million (less than 0.5%) of the £35 billion 2017/18 UK tax gap, it is difficult to argue that the complexity of this tax is warranted.

Anecdotally, it is also clear that tax and legal professionals and conveyancers are struggling with the current suite of complex rules. Ultimately, this impacts on the taxpayer who is relying upon that professional to advise and calculate the correct SDLT liability within the parameters of an ever-changing set of legislative rules and guidance and, from 1 March 2019, a 14-day timeframe to report and pay the relevant SDLT on the transaction. Should that calculation be incorrect, the taxpayer is primarily liable for any additional SDLT, interest and penalties that arise or indeed, for the financing of any incorrect overpayment of SDLT, which may never come to light.

If tax and legal professionals make errors when advising and calculating on SDLT liabilities, this could in future give insurers cause to review the provision of professional indemnity insurance for SDLT compliance and advise work due to its increasingly specialist nature.

Proposal for non-residents surcharge

In February 2019, the Government published a 32-page detailed consultation document, which proposes the introduction of a 1% SDLT surcharge for non-UK residents purchasing residential property in England and Northern Ireland.

The stated aim of the surcharge is to help more UK citizens into home ownership. However, previous attempts to encourage UK residents into home ownership do not appear to have been successful – the current SDLT statistics for the additional 3% surcharge clearly demonstrate that a high proportion of residential property acquisitions are additional acquisitions. It must therefore be questioned if this a realistic outcome which can be achieved by adding a further surcharge.

The proposals outlined in the consultation document and the associated administration arrangements are once again complex. Just some of the initial areas of concern are outlined below:

• Lack of clarity around how to establish UK residence (with a different definition proposed for the purposes of these rules) than under the tests for tax residence elsewhere in UK tax code;
• The definition of dwelling in borderline cases; and
• Scenarios where arrivers in the UK may have to pay the 1% surcharge, which they may be able to claim back later (leading to upfront funding issues and problems claiming refunds).

At the time of writing, the Government is continuing to analyse feedback from this consultation. However, should this proposal proceed, legal professionals and conveyancers will also be required to establish the tax residence of residential property purchasers, in addition to the current level of complex considerations which must already be addressed.

It also seems unlikely that overseas purchasers will be deterred from acquiring UK residential properties. Some are already paying the 15 SDLT flat rate and at a time when the UK is keen to promote itself as being attractive to overseas investors, in the context of Brexit, this proposal seems ill thought-out. Even if the surcharge does act as a barrier for overseas purchasers, it is not clear that this outcome justifies the potential additional complexity for purchasers and their advisers.

Clawback of SDLT reliefs

Finance Act 2019 dealt with a long-standing anomaly in UK tax legislation by amending the intangible fixed assets (IFA) de-grouping charge rules to allow IFA de-grouping charges arising under Sections 780(2) and 785(3) of the Corporation Tax Act 2009 to be ‘switched off’ where the disposal of the relevant shares qualifies for the substantial shareholding exemption. This aligns the treatment of de-grouping charges on IFAs with the same treatment in existence since 2011 for chargeable assets under the UK’s CGT regime.

However, SDLT reconstruction relief, SDLT acquisition relief and SDLT associated company relief (each contained in Schedule 7 Finance Act 2003) still provide for the clawback of the relevant SDLT relief where certain events happen within three years. This anomaly should be considered for removal by the UK Government in a future Finance Act in order to eliminate this complexity, which can inhibit commercial mergers and acquisitions.

Stamp taxes – the Irish experience

In contrast to the UK’s SDLT code, Irish stamp duty (SD) legislation is much simpler. From 9 October 2019, there is one single 7.5% flat rate of SD rate payable on Irish commercial land and property. For residential properties, the banding regime applies a 1% rate to the first €1 million of consideration with a 2% rate applying to any excess. The rules for new and existing leasehold interests are similar to those of the UK.

Executive summary and recommendations

We look forward to engaging in further discussion in future on this discussion paper. In the context of the foregoing, we recommend that the UK Government should task the OTS with carrying out a review of the complexities of SDLT. Any options presented by the OTS, by way of reform, must then be given serious consideration by Government.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this position paper. We have no difficulty with this position paper being published or disclosed in accordance with the access to information regimes. This position paper will be published on our own website in due course and will be available to all our members and the general public.

Source: Chartered Accountants Ireland.