SDLT: Linked Transactions and the Higher Rate

Question:

Miss T and Mr C (a couple) are buying a freehold property on one title, which will be their main residence. It has a self-contained flat within it. The total price is £1,250,000 with the flat valued at £375,000. It is a higher rate SDLT matter, as Miss T has a property that will not be sold at the same time. However, it is on the market and presumably there can be an application for a refund if it is sold within three years of the purchase. Miss T’s interest in her other dwelling has a market value of £40,000 or more and is not reversionary on a lease with an unexpired term of more than 21 years. In addition, the couple are buying a freehold garage, which is registered under a separate title number and owned by a separate vendor (part of the vendor’s SIPP) for £50,000. There will be a separate contract, but the two transactions will be linked and will exchange and complete simultaneously. What is the SDLT payable?

Answer:

The dwellings transaction

Dwellings, such as the self-contained flat, which are ‘subsidiary’ to other dwellings are not subject to the 3% SDLT surcharge in certain circumstances.

To be ‘subsidiary’ to another dwelling (the ‘main dwelling’):

• the dwelling in question must be situated within the grounds of, or within the same building as, the main dwelling;
• the amount of the total chargeable consideration for the transaction which is attributable, on a ‘just and reasonable’ basis, to the main dwelling must be at least two-thirds of the chargeable consideration attributable to the main dwelling and any other dwelling situated as in (1) above and forming part of the transaction; and
• the dwelling must be acquired in the same chargeable transaction as the main dwelling (FA 2003 Sch 4ZA para 5).

Where joint purchasers are neither married nor in a civil partnership, unless each purchaser falls outside the surcharge regime in relation to the acquisition, the surcharge will bite (Sch 4ZA para 2(3)).

Although the self-contained flat will be a ‘subsidiary’ dwelling, the surcharge will be due on the total consideration of £1,250,000 in the first instance. This is because the other dwelling which is being purchased is not, at completion, a replacement for Miss T’s only or main residence; and Miss T owns a higher rates interest in another dwelling (Sch 4ZA para 6).

A dwelling can ‘become’ a replacement for an only or main residence in the following circumstances:

• On the day of completion of the purchase of that dwelling, the purchaser intended it to be his only or main residence.
• Within the three year period beginning the day after completion, the purchaser disposes of a major interest in another dwelling.
• At any time during the three years ending with completion, the dwelling referred to in (2) was the purchaser’s only or main residence.

Multiple dwellings relief (MDR) will be available. It is claimed on the land transaction return by checking box 9 on the SDLT1 and inserting code 33. MDR broadly works as follows:

• The consideration given for the transaction (and any linked transactions) attributable to multiple dwellings (the ‘dwellings consideration’) is divided by the total number of dwellings to give the average price per dwelling.
• The amount of tax due on the average price is calculated using the tax rates and bands for residential property in Table A.
• The amount of tax due on the average price is then multiplied by the number of dwellings to produce the total amount of tax attributable to the dwellings.
• The total amount of tax attributable to the dwellings arrived at as above is compared with an amount equal to 1% of the dwellings consideration, and, if necessary, increased to that minimum amount.

Part or all of the MDR claimed will be withdrawn if, during a period after the effective date of the transaction, an event occurs which had occurred immediately before the effective date of the transaction, would have either: denied the transaction from being a relevant transaction; or increased the amount of tax charged on the transaction. The relevant period is the period ending three years after the effective date of the transaction or, if earlier, the date on which the purchaser disposes of the dwelling or dwellings to an unconnected person.

Applying the 3% surcharge and claiming MDR, the SDLT on the total price would be £80,000 (SDLT of £40,000 (on the average price of £625,000) x 2).

If the main dwelling is or becomes a replacement for both Miss T and Mr C’s only or main residence, the 3% SDLT surcharge of £37,500 (£80,000 minus £42,500) can be reclaimed (using an online form available at bit.ly/2us9dpx).

The garage transaction

Transactions are ‘linked’ for SDLT purposes if they form part of a ‘single scheme, arrangement or series of transactions between the same vendor and purchaser or persons connected with them’ (FA 2003 s 108). The definition of ‘connected’ is set out in CTA 2010 s 1122. Section 1122(6) provides that:

‘A person, in the capacity as trustee of a settlement, is connected with—
‘(a) any individual who is a settlor in relation to the settlement,
‘(b) any person connected with such an individual,
‘(c) any close company whose participators include the trustees of the settlement,
‘(d) any non-UK resident company which, if it were UK resident, would be a close company whose participators include the trustees of the settlement,
‘(e) any body corporate controlled (within the meaning of section 1124) by a company within paragraph (c) or (d)…’

CTA 2010 s 1123(1) gives ‘settlement’ the meaning in ITTOIA 2005 s 620 for the purposes of s 1122. Section 620 provides that settlement includes any disposition, trust, covenant, agreement, arrangement or transfer of assets (except that it does not include a charitable loan arrangement). HMRC regards the definition in s 620 as not covering pension funds for income tax and CGT purposes:

‘It is considered that for the purposes of income tax a pension fund, certainly an approved one, is not a settlement, because of the absence of ‘bounty’; (see Berry v Warnett (1982) 55 TC 92 for a discussion of the bounty test). Accordingly transfers of assets to pension funds are not connected persons transactions’ (HMRC’s Capital Gains Tax Manual at CG14596).

There is also a definition of settlement for SDLT purposes in FA 2003 Sch 16 para 1(1), which provides that a settlement is any trust other than a bare trust. In my view, this definition applies to the exclusion of that in ITTOIA 2005 s 620 in determining ‘connection’ for SDLT purposes. This will mean that the vendor in the dwellings transaction is connected with the SIPPS trustees who are the vendors in the garage transaction, so those transactions will be linked.

The rate of SDLT will then depend on whether the relevant land – the subject of the two linked transactions – is entirely ‘residential property.’ This is determined by applying tests set out in FA 2003 s 116 at the effective date. The relevant part of those tests is set out below.

‘Residential property’ means:

• ‘(a) a building that is used or suitable for use as a dwelling; or is in the process of being constructed or adapted for such use;
• ‘(b) land that is or forms part of the garden or grounds of a building within (a) (including any building or structure on such land);
• ‘(c) land that subsists for the benefit of a building within (a).’

If the garage falls within (b) or (c) when considered in relation to the main dwelling, the property – the subject of the linked transactions – will be entirely residential, so the rates in Table A (including the surcharge) will apply to the total consideration for the main dwelling, the flat and the garage. MDR will be available and will be calculated as set out above but including the garage consideration in the dwellings consideration.

If the garage does not fall within (b) or (c), the property – the subject of the linked transactions – will not be entirely residential, so there will be no 3% SDLT surcharge. MDR can be claimed in respect of the dwellings consideration. In this case, if MDR is claimed, the SDLT payable will be calculated as follows: The tax on the dwellings consideration of £1,250,000 = £42,000.

The tax on the remaining consideration is found by multiplying the amount of tax that would be due in respect of the transaction but for MDR (treating the transaction as non-residential or mixed use) by the fraction produced by dividing the consideration other than the dwellings consideration by the total chargeable consideration for the transaction and any linked transactions: (£50,000 ÷ £1,300,000) x £54,500 (being tax at the Table B rates on the total consideration of £1,300,000) = £2,096.

Therefore, the total SDLT is £44,096.

If the vendor in the garage transaction is not connected with the vendor in the dwellings transaction, the two transactions will not be linked. Therefore, there will be no charge to SDLT on the garage transaction, as the chargeable consideration is below the relevant threshold for non-residential transactions and the garage on its own is not a dwelling.

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This article appeared on the Tax Journal website on 31 August 2017 and is reproduced here with permission.