Since Stamp Duty Land Tax (SDLT) has become steadily more complex and more expensive since its introduction in 2003. One of the more penal features of the SDLT regime is the higher rate charge of 15% where a limited company, or partnership with corporate members, acquires a single residential dwelling that costs more than £500,000 and it does not qualify for one of the reliefs from charge. The reliefs depend on the purposes the building is to be used for.
The recent First Tier Tribunal case of Pensfold v HMRC has considered the issue of the taxpayer’s intention when assessing the charge to SDLT. The case has a wider application than just SDLT, as a taxpayer’s intention is also a relevant factor when assessing exemption from the Annual Tax on Enveloped Dwellings (ATED) charge.
This article considers what practical matters we can take away from the judicial consideration of this point of law.
SDLT is a tax paid by a purchaser on the acquisition of an in interest in land located in England and Northern Ireland. Residential property is subject to SDLT at rates up to 12% of the acquisition cost of the land and there is also a risk that there may be an additional 3% surcharge on top of the standard rates, if the purchaser owns any other residential property anywhere in the world at the time of the relevant purchase. However, Schedule 4A FA 2003 was introduced to impose a flat rate of SDLT of 15% on purchases by limited companies of an interest in a single dwelling costing more than £500,000. This is subject to various exemptions.
Recent caselaw: Pensfold v HMRC
In Pensfold, the taxpayer, a Cayman Islands company, bought a farm in England in 2017 for £2.85 million with the intention of developing it into an eco/agritourism business. The SDLT return was submitted claiming that relief from the 15% flat rate was due because the property was acquired with the intention of using it in a trade that involved making a dwelling available to the public, as per para 5B Schedule 4A FA 2003.
Unfortunately, the development was delayed – in part by an HMRC SDLT enquiry which was felt might have given rise to material additional SDLT costs and might thus reduce the funds available for the project. After an extensive enquiry, HMRC concluded that the property should have been charged at 15% on the entire purchase price and issued a demand for further SDLT of £293,000 and imposed a penalty of £112,805 (38.8%).
The exemption under Para 5B requires that the property:
“is acquired with the intention of using it within a qualifying trade and reasonable commercial plans have been formulated to carry out that intention without delay, except so far as delay may be justified by commercial considerations.”
HMRC argued that to qualify for relief, detailed commercial plans must be available on the day of purchase and that the delay to implement the trade due to the SDLT enquiry was not a commercial decision.
The judge found for the taxpayer and, in his judgement, he noted the following important points:
“What is important is the intention, and the plans which we were shown for the trade which was envisaged clearly show that the intention was that the property would be available to the public “on at least 28 days in any calendar year”.
“In our view, however, this does not mean that the detailed plans which we were shown had to have been available at the date of purchase. What is required is reasonable commercial plans.”
Why does it matter?
The decision confirms that it is the taxpayers’ intention to carry on the qualifying trade that is important and that there is no requirement for that trade to have actually been carried on for the exclusion to apply. Notably the legislation provides for a clawback of relief under para 5H Schedule 4A FA 2003 for projects that don’t take place.
Furthermore, there is no requirement that detailed plans have been drawn up at the time of acquisition, only that reasonable commercial plans have been put in place and that delays to draw-up detailed plans or to implement the plans because of potential additional costs are justifiable commercial considerations.
In Pensfold the taxpayer had no direct evidence of its commercial plans at the time of acquisition to present to the Court, which instead accepted evidence from witnesses. It’s a clear reminder that the taxpayer should document their intention at the time, for evidence, should later discussions with HMRC and the Courts arise.
This case has particular importance at the moment where trades and development projects are on hold because of the Coronavirus pandemic. The case demonstrates that, so long as the intention to trade still remains and is documented, then the lack of development or trading activity should not mean SDLT clawbacks or ATED charges arise.
Finally, the tribunal said no penalty was due because the buyer had taken reasonable care to avoid inaccuracy by using a reputable firm of solicitors to complete the return.
Each case must be considered on its individual merits and the Tribunal’s comments suggest that the Pensfold case would have benefitted from contemporaneous evidence of its intentions. Nonetheless, it is the taxpayer’s intention at the date of purchase that determines whether the purchase qualifies for relief, there is nothing in the legislation that requires the project to have begun for it to then qualify for relief and that it is important for there to be reasonable plans for the project’s implementation, not that it had been implemented.
At the date of writing this, the case has been listed for appeal to the Upper Tribunal and we await further developments.
If any potential purchasers or professionals involved in a property purchase would like further advice on the application of the SDLT rules, please call your usual Saffery Champness contact or Adam Kay, E:[email protected], T: +44 (0)20 7841 4291 or Susan Dennis, E: [email protected], T:+44 (0)20 7841 3138.