Categories
Stamp Duty Refund

5 facts about employee stick ownership plans

You might have heard of employee stock ownership plans, but what exactly are they, and how do they work?

Our brief guide explains the basics…

What is an employee stock ownership plan?

An employee stock ownership plan (ESOP), also sometimes known as a stock purchase plan, is essentially a benefit plan that gives an ownership interest in the business to its employees.

It works by allocating shares to employees who are eligible for the scheme. The number of shares received by individual employees can vary depending on different criteria. This could be based on pay scale, role, or some other criteria for deciding share distribution.

There are some definite benefits in an ESOP, for both employers and employees, but there may also be some drawbacks.

The benefits of participating in an ESOP

One of the main benefits for the company providing the ESOP is that the workers who participate are likely to be more personally invested in the company. This can improve motivation, morale and performance – if an employee has a concrete stake in the company, then it is, after all, in their own best interests to help it to succeed and see its value increase.

Operating an ESOP can also sometimes help with employee retention as workers may be more likely to stay and continue to build up their shares.

The employees’ shares are generally held in a trust until the individual worker concerned either leaves or retires. At that point, they are free to sell the shares, either back to their former employer or on the open market. They are not taxed on the ESOP shares until they are sold, and even then, taxation can sometimes be deferred further if they reinvest in certain ways.

Additionally, employees generally have to work with the company for a given period of time before qualifying for the scheme.

Measurable benefits can often be seen for the company operating an ESOP. The National Center for Employee Ownership (NCEO) cited a study by Rutgers, which showed that companies with an ESOP in place grew 2.3% faster after setting up the scheme.

Potential drawbacks for employees

If the company performs poorly or suffers a setback, then employees who are participating in an ESOP could find their shares losing equity. This possibility is balanced, however, by the fact that employees at firms with an ESOP in place tend to receive higher employer contributions to their savings plans than employees at other companies.

Another potential drawback is that many employees who participate in this type of scheme will put all their investment eggs in one basket. In other words, they may rely on the ESOP as their main or only type of saving and are unlikely to have a very diverse investment portfolio. It’s worth remembering that most financial advisors would caution investors who sunk more than 10% of their total available assets in company stock, which can be unreliable.

How many employees operate ESOPs in the US?

The NCEO says that there are around 7,000 of these schemes currently being operated within the US, with an estimated 13.5 million workers participating in the ESOPs. There are also some other forms of employee ownership that are not the same as ESOPs. These include stock options and direct purchase plans. According to the NCEO, around 8% of total corporate stock is owned by employees through some sort of stock distribution scheme.

What you should know as a jobseeker

Questions about employee benefits can often be overlooked during the interview process, but it’s important to learn as much as you can about the benefit packages and schemes that are being offered. As well as finding out if you are a suitable employee, after all, the process should also help you to determine if the employer is the right fit for you. In some cases, an ESOP might not be the best option if it replaces other retirement benefits.

If you are offered a position, you should make sure that you know exactly how it works. Some important considerations to keep in mind are how the benefits will be paid out, how the scheme will be taxed, and the value of the stock on offer.

Categories
Stamp Duty Refund

Stamp duty guide and FAQs

The Chancellor announced in 2018 that stamp duty was being abolished for some first-time buyers, but many home buyers will still end up paying Stamp Duty Land Tax on their properties. The amount you pay can vary depending on a number of factors, but our extensive guide and FAQs will help guide you through this tax and answer any questions you might have.

What is stamp duty?

Stamp duty or, more fully, Stamp Duty Land Tax (SDLT) is a tax that you pay to HMRC when buying a property over a certain price. It is a lump-sum tax that is paid within a set time of completing the purchase. How much you will pay depends on a number of factors, including the price of the property, whether you are a first-time buyer, if you are purchasing the property as a second home, and whether it also has a commercial use. This guide will focus on residential properties (homes) rather than commercial properties, however.

The rules on stamp duty have changed several times since its inception. One of the biggest changes, introduced in 2014, saw the tax being changed from a “slab” system, where a single rate was paid based on the entire property price, to a progressive system using price bands.

Stamp duty in England and Northern Ireland

The current system applies to England and Northern Ireland, and you pay tax based on different rates for different portions of the entire cost of the property.

This can be quite complex to work out, so let’s say, for example, that you are buying a property for £500,000.

  • You pay nothing below £125,000
  • You pay 2% on the portion between £125,000 and £250,000
  • You pay 5% on the portion between £250,000 and £500,000

This means that you pay 2% of £125,000 = £2,500

Plus 5% of £250,000 = £12,500

So the total amount of stamp duty you would pay in this case would be £15,000.

Stamp duty for first-time buyers

If you are buying your first home in England or Northern Ireland, different rules apply, as long as the property costs no more than £500,000.

In this case, the first £300,000 is exempt from stamp duty. This means that you will not pay any stamp duty on properties that cost £300,000 or less. If they cost between £300,001 and £500,000, then you will only pay stamp duty on that portion, at a rate of 5%.

So, going back to the above example of purchasing a property for £500,000, only this time for a first-time buyer:

You pay nothing below £300,000You pay 5% on the portion between £300,000 and £500,000, which is £10,000

In this case, you would pay £10,000, making a saving of £5,000.

If you are buying a home worth more than £500,000, you will have to pay standard stamp duty rates, even if you are a first-time buyer.

Note that if you buy as a shared owner (with a spouse or partner, for example) and you are both first-time buyers, you will be able to get the first-time buyer’s rate, as long as the property does not cost more than £500,000.

Will I count as a first-time buyer?

For the purposes of stamp duty, a first-time buyer is a person who has never owned their own home anywhere in the world. Despite the name, this includes properties that you inherited, so you might be better thinking of it as “first-time homeowner” rather than buyer.

Additionally, you will not count as a first-time buyer if you are buying a home with the intention of renting it out, even if it is your first property purchase.

The Scottish equivalent to stamp duty

In Scotland, there is a similar system called “land and buildings transaction tax”. It still works on the same principle, being a lump-sum tax that you pay when you buy a property over a certain amount, but the thresholds for the bands are different.

Using the example of a £300,000 property purchase:

  • You pay nothing below £145,000
  • You pay 2% on the portion between £145,000 and £250,000
  • You pay 5% on the portion above £250,000

This means that you pay 2% of £105,000 = £2,100

Plus 5% of £50,000 = £2,500

So the total amount of stamp duty you would pay in this case would be £4,600

The Welsh equivalent to stamp duty

Wales also has a system that works the same way but with different rates. It is known as the Welsh Land Transaction Tax.

For a property costing £300,000:

  • You pay nothing below £180,000
  • You pay 3.5% on the portion between £180,000 and £250,000
  • You pay 5% on the portion above £250,000

This means that you pay 3.5% of £70,000 = £2,450

Plus 5% of £50,000 = £2,500

So the total amount of stamp duty you would pay in this case would be £4,950.

What rate of stamp duty or equivalent tax will I pay?

The rate of stamp duty you have to pay (or the equivalent tax in Scotland and Wales) will depend on the purchase price of the property.

The first part is always exempt from stamp duty. After that, you pay a percentage rate that rises at certain thresholds. Remember though, you only pay that rate for the portion of the price that falls within each band.

People buying additional properties such as second homes will also have to pay an extra stamp duty charge on any property that costs more than £40,000.

This is an extra 3% for each band, so for the first £125,000, they will be charged 3%. For the portion between £125,001 and £250,000, they will pay 5%, and for the portion between £250,001 and £500,000, they will pay 8%, etc.

The standard rates of stamp duty are as follows:

  • £0 to £125,000 0%
  • £125,001 to £250,000 2%
  • £250,001 to £925,000 5%
  • £925,001 to £1.5m 10%
  • More than £1.5m 12%

What rate will I pay as a first-time buyer?

If you are a first-time buyer and your property costs no more than £500,000, you will pay different rates. If it costs more than £500,000, you will pay the standard rates as shown above on the whole cost of the property.

For first-time buyers buying a property for £500,000 or less, the following rates apply:

  • £0 to £300,000 0%
  • £300,001 to £500,000 5%

What rates will I pay in Scotland?

Scotland has a similar system, but the rates and thresholds are different.

The standard rates are as follows:

  • £0 to £145,000 0%
  • £145,001 to £250,000 2%
  • £250,001 to £325,000 5%
  • £325,001 to £750,000 10%
  • More than £750,000 12%

How do I pay the stamp duty I owe?

It’s important to remember that you have 30 days from the date of completion to pay any stamp duty you owe. This also applies to the equivalent taxes in different parts of the UK.

In practice, your solicitor will usually pay this and add it to your bill, but it is still your responsibility to make sure that any stamp duty owed is paid. If you do not pay it or are late, you could face additional penalties and interest.

If your solicitor does not pay it for you, you will need your Unique Transaction Reference Number (UTRN). The easiest way to pay directly is by making a bank transfer to HMRC. In Scotland, you will pay Revenue Scotland instead of HMRC, but, again, your solicitor will probably take care of this on your behalf.

Can I add the stamp duty I owe to my mortgage?

The short answer is that you may be able to (depending on the lender), but it’s often better if you don’t. The stamp duty will be paid to HMRC straight away as it is a lump sum tax, but you will usually end up paying the cost of it back to your lender for the lifetime of your mortgage. Over a 25-year term at a rate of 5% interest, this could mean that an extra £5,000 of borrowing to cover the stamp duty would cost around £8,500 in additional interest.

It could also affect your loan-to-value ratio (LTV), which is a figure based on how much you are borrowing against the value of the property. Borrowing more could push this figure up and affect the mortgage rates and deals that your lender is willing to offer. It may be worth consulting a mortgage broker to see if adding any stamp duty to your mortgage is the best decision.

Categories
Stamp Duty Refund

Stamp Duty Land Tax on self-contained “granny flats”, annexes and other dwellings

Summary

Anyone who buys a property with a self-contained dwelling should check whether the 3% surcharge for buying second or additional dwellings should be applied to the entire purchase price. These dwellings could comprise a separate annexe such as a “granny flat” attached to the main building or another type of self-contained dwelling such as a gardener’s cottage on the grounds. 

Amendments to Stamp Duty Land Tax (SDLT) rules brought through in the Finance Act 2016 are retrospective, and it may also be the case that relief for multiple dwellings can be claimed in some cases without triggering the surcharge.

Contact us for more information or to discuss this or any other area of SDLT or property taxes.

 

Background to SDLT Multiple Dwellings

A 3% surcharge on standard SDLT rates was introduced in the Chancellor’s Autumn Statement of 2015. The stated aim was to reduce demand for residential properties that were not being bought with the intention of being lived in by the buyer. Where applicable, the surcharge is applied to SDLT for the whole price of the purchase.

A consultation paper issued at the same time discussed cases in which multiple residential properties were bought in the same transaction. Where any of these counted as additional properties, the paper said that the transaction would be eligible for multiple dwellings relief. The higher rates would only be applied to the average price of the properties, but the paper did not indicate any issues pertaining to the purchase of properties with self-contained dwellings such as granny flats.

A Guidance Note was later published on 16 March 2016, which again gave no indication of a problem with relation to self-contained dwellings.

Some points to note:

  • Paragraph 2.10

Here, the Guidance Note points out that it is important to decide whether a property consists of a single dwelling or more than one.

  • Chapter 4

This chapter deals with the purchase of multiple dwellings in a single transaction, though it makes no specific mention of self-contained dwellings such as granny flats.

  • Paragraph 4.1

It is made clear here that if two or more dwellings are considered in the same transaction, the normal rates or higher rates should be applied to the whole purchase price, rather than using a mixture of rates.

  • Paragraph 4.7

This seems to deal with the subject of separate dwellings such as annexes without specifically naming them. It says that where multiple dwellings are purchased in a single transaction, the higher rates should be applied to the entire transaction. The Guidance Note was superseded by amendments issued later, however – therefore, paragraph 4.7 became outdated.

Press coverage in April 2016 suggested that the 3% surcharge could have a negative and unintended effect on people who were buying a home with a granny flat. It was suggested that these buyers could be treated the same as if they had bought two separate properties at the same time, with the 3% surcharge being applied to the whole purchase price. This could be the case even if they owned no other home.

The then Financial Secretary to the Treasury, David Gauke, responded to the negative press coverage with a statement that said it was not the intention of the legislation to treat those people buying a home with a granny flat in this way and added that amendments would be issued.

The Finance Act 2016 came into force on 15 September 2016, but the amendments were retrospective going back to 1 April 2016.

A revised Guidance Note was published on 29 November of that year and covered the subject of granny flat-style separate dwellings across paragraph 2.10A to 2.10F. Examples were also provided in Chapter 9. This official guidance was subsequently moved to the HMRC Manual, while the Guidance Note PDF was removed. The text can still be found in the archived Guidance Note, however.

Does the property count as a single dwelling or Multiple?

The rules say that a building or part of a building can still count as a dwelling if it is suitable to be used as such. This may be the case even if it is not currently being used or intended to be used in the future as a separate dwelling.

In the case of granny flat-style annexes, the house and granny flat will probably be considered as two separate dwellings if:

  • Each part has its own front door. In the case of the granny flat, this may come off a commonly used part such as an entry hall, but in either case, you would not have to pass through a private living area of the other part to get to it.
  • Each part is self-contained and has all the elements that you would expect for a dwelling, such as sleeping, washing and cooking areas and facilities

Some other factors that may apply include the set-up of essential services such as water, power and heating. If they are on two separate self-enclosed systems, then this would add to the likelihood of the property being counted as two dwellings. If an electricity fuse box or central heating control was located entirely in the main part, however, with no access or control from the granny flat, then this would stand against them being counted as separate dwellings.

The legislation does little to clear up whether the “legal suitability” of the granny flat to be used as a dwelling in regard to planning permission, etc., has a bearing on whether it should be classed as a separate dwelling for the purposes of SDLT. HMRC has been reviewing the use of the term “dwelling” as it pertains to a number of different tax issues. 

At one point, the HMRC Stamp Taxes Head of Policy indicated to tax professionals that a dwelling’s definition should be based upon its physical configuration, not what it could legally be used for.

The revised Guidance Note, which is now in the Manual, says at 2.1 that: “A self-contained part of a building will be a separate dwelling if the residents of that part can live independently of the residents of the rest of the building, including independent access and domestic facilities.”

At 2.7, it adds that a dwelling is considered to be “a building, or a part of a building that affords to those who use it the facilities required for day-to-day private domestic existence”.

At 2.8, it also notes that holiday homes count as dwellings, even if they are not able to be used throughout the year. This suggests that planning positions are not afforded a great deal of weight when it comes to deciding what will be classed as a dwelling for the purposes of SDLT. 

The issue of how much weight to assign planning positions relating to whether a granny flat is able to be disposed of separately from the main home, or that state that it can only be used by a relative of the main house’s occupant, is also not clear. In a draft of the Revised Guidance Note, HMRC had said that whether the annexe was able to be sold separately would indeed be extremely relevant, but this suggestion was removed from the final publication that emerged on 29 November 2016.

Council Tax banding rules have their own definitions of dwellings being “a building or part of a building, which has been constructed or adapted for use as separate living accommodation”, but again, this should not be seen as determinative for the purposes of SDLT.

In the final analysis, the position of a property with a granny flat will often be open to interpretation. HMRC is not the final arbiter in a dispute that goes to court but only presents its own view of the situation. As a self-assessed tax, however, it is buyers and their representatives who initially have to try to interpret these often unclear regulations.

Several examples could be given of set-ups where it is not initially clear whether a property should be counted as one or more separate dwellings for the purposes of SDLT.

Let us consider:

  • A home with a detached two-storey garage building. Above the actual garage, the second floor is a “guest suite” with a bedroom-cum-living area, a small kitchenette and a bathroom. It is accessible without passing through the main part of the property and has what amounts to its own front door, as well as heating, water and power controlled from the suite. It has not been rented out but is used by the family living in the main part of the property. This is clearly capable of being used as a separate dwelling, but it still remains unclear whether significant weight should be given to whether it has its own Council Tax band and any other planning positions.
  • A four-storey house in the city has a basement that has its own access (stairs and an effective front door) from the street. It has all the facilities generally required of a dwelling (its own lighting circuit, power, heating, bathroom, kitchen, etc.) and cannot be directly accessed from the main building. Even if it is only used by the same family living in the main parts of the building, it is likely that it would be treated as a separate dwelling by HMRC. This could be the case even if planning permission would need to be granted before it could be used by different occupiers.
  • A house has a flat or living quarters for staff. This has a lockable door and facilities, including a small bathroom and kitchenette. It is only accessible via the living areas of the main home, however. In this case, the lack of its own access would probably see it viewed as a part of the main property rather than a separate dwelling.
  • A house has a flat attached that, again, has all the facilities you would expect from a dwelling. This time, however, the flat has entrances both from the outside and from the living area of the main house or home. This would be open to interpretation but would probably be counted as a separate dwelling, especially as it could be argued that the interior door access could easily be closed or blocked off. Another important factor would be whether the services (power, heating, etc.) operated independently.
  • A property consisting of a main house with a separate holiday lodge in the grounds or garden. This has all the usual facilities for a dwelling, but planning consent says that it can only be used at certain times, not all year round. This means that it is not legally suitable for a permanent dwelling, yet HMRC seems to favour the stance that it would count as a separate dwelling for the purposes of SDLT. This is because HMRC puts more weight on the physical suitability of the structure to be used as such.

Regulations under the 2016 Budget Resolutions

The law as set out under the 2016 Budget Resolutions (pre-amendments) said that the 3% surcharge would apply to the whole cost of the transaction if a single transaction pertained to two dwellings and:

  • The part of the price realistically attributed to each was £40,000 or more.
  • Neither dwelling was subject to a long lease with more than 21 years to expire. Note, this does not refer to leasehold properties, but rather to those subject to a long lease, where the purchaser would ordinarily get just a ground rent.

This would be the case even if:

  • The purchaser had no other property interests counting against them.
  • They did own other property but would qualify for relief on the basis that they were replacing their only or main residence.

This meant that under that regime, most properties that included a granny flat or similar would have been taxed with the separate dwelling surcharge.

It may help to mention the passages that detail the circumstances under which a transaction would attract the surcharge as set out in the Budget Resolutions legislation. The relevant sections are paragraphs 3 to 7. These are the “charging paragraphs” setting out various conditions and exceptions, and they deal with the following general circumstances:

  • Paragraph 3

The buyer is an individual buying a single dwelling (i.e. not one where a granny flat counts as a separate dwelling). Exceptions here to the surcharge include where the buyer is replacing their main or only residence, or does not have any other property interests counting against them.

  • Paragraph 4

The buyer purchases a single dwelling but is not an individual. This means businesses, collectives and organisations. There are very few exceptions to the surcharge.

  • Paragraph 5

The buyer is an individual buying two or more dwellings of the kind that the surcharge is intended for. Again, there are very few exceptions in this case.

  • Paragraph 6

The buyer is an individual buying two or more dwellings, but only one of these is of the type for which the surcharge is intended. Exceptions again apply when the buyer is replacing their main residence or does not have other relevant property interests counting against them. This is the provision that was amended to try to ensure that genuine granny flats and the like do not fall under the type of property that the surcharge is intended to catch.

  • Paragraph 7

The buyer is not an individual (again, this tends to mean that they are a business, organisation, etc.) and buys two or more dwellings. Even if only one counts as the type that the surcharge is intended for, there are very few exceptions.

This article is concerned largely with the circumstances described in paragraph 5, including where failing a condition set out in that charging paragraph results in the transaction being covered by one of the other (generally less favourable) charging paragraphs.

Amendments to the legislation regarding granny flats and similar annexes

The relevant amendments to the Finance Bill 2016 were tabled on 28 June 2016 and came into force on 15 September, with retroactive effects back to 1 April of that year. The amendments effectively acted to treat properties with a granny flat like the purchase of a single property or dwelling, as long as some conditions were met.

As a note issued with the amendments explains: “The amendments affect purchasers of dwellings with self-contained annexes or outbuildings that are, themselves, dwellings. These purchasers will not be subject to the higher rates of SDLT only because they have purchased such a pair of dwellings. The purchases will still be subject to the higher rates of SDLT if the purchaser already owns another dwelling and is not replacing a main residence.”

The amendments effectively called for a relevant transaction to pass the following test:

  • The granny flat or subsidiary dwelling must cost no more than a third of the total cost of the purchase. This is based on a fair and reasonable valuation, not the actual splitting of the payment or transaction.
  • It must be part of the same building or within the garden and grounds of the main building.

It should not now matter how the subsidiary dwelling is used or intended to be used, even if it is rented out to a tenant rather than a family member. The test does not take into account any planning conditions that require the annexe to be occupied, or limit the ways that it can be disposed of.

The statutory provisions are not always easy to follow. We will provide some examples later, but for now, these are the parts of the rules that determine whether the surcharge will be applied to a transaction involving a property with two or more dwellings. 

Essentially, the surcharge will apply under charging paragraph 6 as set out previously if all the following conditions (i to v) are met:

  • The buyer is an individual. This means that they are not a company, organisation, etc
  • The property includes two or more dwellings. If it only counts as a single dwelling, then other charging paragraphs will apply. This does not mean that the surcharge will automatically apply, however, as other conditions may not be met.

It is also worth noting that in some cases, multiple dwellings relief may be applicable if the buyer has two or more dwellings and passes the subsidiary dwelling test set out above.

  • Only one of the dwellings meets the following conditions (A, B and C). In practice, this is more likely to apply to the main dwelling.

A and B: The conditions previously set out, where the deemed price of the part under consideration is £40,000 or more; along with the dwelling not being subject to a long lease.

C: Only one dwelling (i.e. the main one) is not subsidiary to any of the others. If this is not the case, then you will move into the auspices of one of the other charging paragraphs. The purpose of this provision is essentially to filter cases where there are more than one main residential dwelling, rather than a main dwelling and a subsidiary one. Two matching flats, for example, would fail this provision.

It’s also worth noting that where there are more than one subsidiary dwelling, the transaction might still fall into one of the other charging paragraphs.

  • The main dwelling part of the property in the transaction is not acting as a replacement for the buyer’s existing main or only residence. This condition can provide an exception to the surcharge if the main dwelling is replacing a former residence, though conditions apply and these were revised and tightened up in 2017’s Autumn Budget. The buyer must be intending to live in the main (i.e. most expensive) dwelling rather than the subsidiary one in order to avoid the surcharge on these grounds.
  • The buyer has other property interests counting against them at the time of the transaction’s completion. It’s worth remembering that these property interests have to be valued at £40,000 or more in order to count against the buyer.

Multiple dwellings relief (MDR)

This type of relief has been around since 2011 and can be very useful for buyers where multiple dwellings are bought within the same or a series of linked transactions. The definition of a “dwelling” in reference to this relief is pretty much the same as that used for the application of the 3% surcharge. When applying MDR, you will first need to calculate the average cost of the properties. The SDLT is then applied using this average. It can result in a saving as you can benefit from the lower rate tax bands on each of the properties.

In the case of properties purchased through linked transactions, a notional tax is worked out for all of the combined payments in the series of transactions. This is then shared proportionally between the transactions based on the price of each.

Mixing surcharged and “normal” properties

According to HMRC, the rules “do not allow for a single transaction to be a combination of higher and normal residential rates”. This is clearly stated in paragraph 4.1 of the Guidance Note, but the note does not provide examples of how SDLT should be calculated for linked transactions, where some of the properties may attract standard stamp duty while others have the surcharge applied.

During a meeting with tax professionals in March 2016, HMRC’s Head of Stamp Taxes Policy said that it was the case that linked transactions could incorporate some purchases that were affected by the 3% surcharge and others that were not. He approved of a Finance Act 2003 formula that could be used to calculate the tax owed in a way similar to that described above – using a notional tax amount on a combined figure. A proportion of the different figures would then be taken using the relevant proportion of the chargeable consideration. 

At this point, even the explanations are getting extremely convoluted and complex.

The surcharge and multiple dwellings relief

HMRC’s revised Guidance Note, which was issued in November 2016, included some guidance on how MDR and the higher surcharged rate of SDLT are intended to interact.

They provide examples in paragraph 5.12 and explain that MDR can be claimed when multiple dwellings are bought in a single or series of linked transactions. If MDR is claimed on these transactions, however, then the surcharge will apply. 

The Explanatory Note issued alongside the 2016 Budget Resolution adds: “Subsection (4) provides that where a claim to multiple dwellings relief is made, the higher rates apply in calculating that claim.”

Despite this written guidance, it does not always appear to be true that claiming MDR automatically sees the 3% surcharge applied. It does not appear to apply, for instance, in cases involving linked transactions and/or properties with granny flats.

Perhaps crucially, the wording of the revised MDR provisions says that account should be taken of the surcharge “if the relevant transaction is a higher rates transaction” (bold added).

For linked transactions, the MDR provisions work by treating each individual transaction as a “relevant transaction”. The stamp duty owed is worked out independently for each transaction as a fraction of a notional amount. This notional amount is worked out based on the payments of all the linked transactions combined.

If we consider the way that the MDR provisions are worded and apply them to a typical “granny flat” case where two or more dwellings fall within a single transaction and the surcharge would not normally be applied, it appears to be true that MDR can sometimes be claimed without the 3% surcharge necessarily becoming applicable as a result.

It’s worth noting that even if the Explanatory Notes suggest that this was not the intention of the legislation, what counts more is the actual wording of the legislation. If taken to a conclusion, it is ultimately down to the courts to decide on the proper interpretation of this legislation. 

Practical examples

While it may ultimately be down to the courts to interpret these rules, it is still the buyer and their representatives who have to provide their calculations in the first place. In order to help with this process, we will now consider some examples that will hopefully clarify some of the issues.

Example 1

A house with a granny flat and no other property interests

A couple are looking to sell their only home and move up to a larger one with a granny flat incorporated into the property. Their intention is to occupy the main part of the property themselves, while the woman’s mother moves into the granny flat. The flat is self-contained with its own utilities and comprises a living area, bedroom, bathroom and kitchen. It also has its own front door, and a reasonable assessment of the price would be £450,000 for the main part of the property and £150,000 for the granny flat. The couple do not have any other property interests.

In this case, it would be very likely that the main part and the granny flat would be classed as two separate dwellings for the purposes of SDLT.

As per the amendments brought in with the Finance Act 2016, the transaction would not be subject to the surcharge. This is because the granny flat is part of the same building as the main dwelling and the value of the main part is two-thirds or more of the total price. With no other property interests to account for, the transaction would attract the standard SDLT rate and they would pay £20,000.

There may be a case, however, for claiming MDR without triggering the surcharge. If the main residence and the granny flat can be counted as two separate dwellings, then you could average the price and pay standard SDLT as if it were for two properties worth £300,000 each. This would work out at two lots of £5,000 or a total tax bill of £10,000. In this case, it would be better for the property to be treated as two dwellings rather than one.

Example 2

A house with a cottage and a paddock

A couple are buying a large house with its own grounds, including a paddock, orchard and gardens. There is also a cottage within these grounds. It used to be a gardener’s cottage but is currently vacant. They are paying a total of £1.2m and are planning on living in the main house while renting out the cottage. A fair apportionment of the total price has been assessed at £900,000 for the house, garden and orchard, £200,000 for the cottage, and a further £100,000 for the paddock. By the time the transaction has been completed, they will have no other property interests for the purposes of SDLT.

A main factor here will be whether the property can be classed as “mixed” or entirely residential. It could be classed as mixed residential and non-residential, for example, if the paddock is separate to the rest of the grounds and is used commercially by a local farmer. The 3% surcharge will not be applied to a mixed-use property and non-residential SDLT rates would apply. For a property of £1.2m, this would amount to £49,500.

If MDR were to be claimed, this would apply to £1.1m for the house and cottage, with the £100,000 for the paddock being taxed at 1/12 of that £49,500. The two residential elements (the house and cottage) would be averaged and taxed at £550,000, resulting in SDLT of 2 x £17,500 = £35,000. The non-residential portion for the paddock would add a further £4,125 for a total SDLT bill of £39,125.

If the paddock was not counted as non-residential, then the entire property would be residential and the rules for mixed-use would not apply. In this case, you could still potentially avoid the 3% surcharge via the amendments from the Finance Act 2016. The property must pass the subsidiary dwelling test. As the cottage sits in the grounds of the property and costs less than a third of the total price, this should not be an issue. With the surcharge not applied, the regular rate of SDLT would be £63,750.

If MDR could be claimed without triggering the surcharge, then this bill could potentially be reduced further. The SDLT would be applied to the average cost of the two dwellings or two lots of £600,000. This would give two lots of £20,000 or a total of £40,000.

If the 3% surcharge were to be applied – perhaps because the cottage did not sit in the grounds, therefore failing that part of the test – then the normal SDLT of £63,750 would also attract a surcharge of £36,000 for a total of £99,750. A valid MDR claim could reduce this to £76,000, which would be calculated as two lots of SDLT with the surcharge on average prices of £600,000 per dwelling.

Example 3

Moving from a house to one with a granny flat while owning other properties

An unmarried couple are selling their only residence, a house they own jointly, and moving into a new house with a granny flat. This will be their only residence, but they have the granny flat in mind for elderly parents further down the line. Until then, they intend to rent it out, and this can be done with no meaningful alterations to the property.

Their other properties are a jointly owned holiday home in France worth £75,000 and a house that they rent out worth £250,000.

Firstly, the fact that they intend to rent out the granny flat should not matter as it will otherwise pass the test for a subsidiary dwelling. The fact that they own other properties may stand against them when it comes to the surcharge, however.

The holiday home in France will not actually count for the purpose of the SDLT surcharge. This is because properties must be £40,000 or more to count and the tests will be applied against the owners separately. Each has a joint share worth £37,500, which falls below the £40,000 threshold. The other house that they let will count against them, however, and even with the share taken separately, each is well above £40,000. 

They could, however, claim MDR to reduce the SDLT owed, presumably without automatically triggering the 3% surcharge.

Example 4

Buying a house with two self-contained flats

A couple are buying a house with large grounds. There are two garages within the grounds, each of which has a self-contained flat above it. They are selling all their other property interests in order to fund the move. They intend to live in the main house and rent out both flats.

It is likely that, as per the amendments, they could escape the surcharge as long as both flats are clearly within the grounds of the main property and the house or main part of the property is deemed to be fairly valued at more than two-thirds of the total transaction.

It might also be the case that they could claim MDR without triggering the 3% surcharge. As there are three dwellings, you would divide the cost of the transaction by three to find the average price and work out the SDLT due on each, before multiplying by three. This could potentially provide a substantial saving.

Example 5

Two flats within the same building

A new building contains eight flats. Six have already been sold on long leases with nominal rents. A couple are looking to buy a freehold on the building in order to get the two remaining ones, which consist of a large main flat on the top floor and a smaller one of less value in the basement. They intend to live in the larger flat and rent out the smaller one. They intend to sell their jointly owned main residence to fund the purchase but do have other property interests.

Even though these do not fit the traditional idea of a main dwelling and “granny flat”, this could still fall within the categorisation under the amendments to the Finance Act 2016. This is because both flats are in the same building and were purchased in the same transaction.

One factor would be the value, however. The more valuable flat would have to be fairly valued as being at least two-thirds of the overall cost of the transaction in order for one to count as a main and the other as a subsidiary dwelling. If the values were not different enough, then the whole transaction would attract the 3% surcharge.

This example is similar to one provided by HMRC in Chapter 8 of its Guidance Note. HMRC agrees that the whole transaction would be liable for the surcharge, but adds that MDR would be available.

Example 6

A house and cottage bought in two linked transactions

A couple are buying a large house with a cottage on the grounds, but the two properties are held by different, though linked, sellers with separate titles. The two transactions are linked and will be signed on the same day with the contracts for £800,000 for the house and £300,000 for the cottage. It has been agreed between buyers and sellers that the transactions will only go ahead together.

The couple intend to sell their current and only residence to fund the move. They will live in the house and their elderly relatives will move into the cottage.

In this case, the “granny flat” amendments do not apply because even though they are linked, the two properties are not being purchased in the same transaction. As the main house is being bought to replace a current and main and only residence, however, then that should escape the surcharge. The cottage will not, so the situation is of two linked transactions with one liable for the surcharge and the other not.

Notional tax has to be worked out – one amount for the tax that would have been paid had the surcharge applied and another for the tax that would have been paid had it not. The actual amount owed is then worked out based on the proportional values of the property.

In this case, the total consideration is the combined value of the two linked transactions, which is £1.1m.

The SDLT due on that amount without the surcharge would be £53,750. With the surcharge, it would be £86,750.

To work out the actual SDLT owed, you would use a formula based on the relative values of the linked transactions.

This would be £800,000 / £1,100,000 x £53,750 = £39,090 for the house without the surcharge.

And £300,000 / £1,100,000 x £86,750 = £23,659 for the cottage with the surcharge.

These two figures are then added together to get a total SDLT figure of £62,749.

There’s more, however, as MDR can also be applied to the linked transactions.

First Time Buyers’ Relief

Another form of relief available to some buyers is First Time Buyers’ Relief, which was introduced in the Autumn Budget of 2017. As the name implies, it is available only for first-time buyers and also only for properties costing up to £500,000. This relief can never apply in transactions that attract the 3% surcharge, however, or where two or more dwellings are purchased in a single transaction.

Of the examples provided above, Example 6 would be the closest to qualifying for this relief as the cottage is being purchased in a separate transaction to the house. First Time Buyers’ Relief would still not apply, however, as the buyers are not first-time buyers, the cottage is liable for the surcharge, and the linked transaction does not only cover gardens and grounds.

Property tax in Wales

Please note that as of April 2018, most purchases in Wales are covered by “Land Transaction Tax” and not SDLT. The two systems are similar but have different rules and especially different rates of tax.

Disclaimer

This article is intended to provide general information only and is not intended as professional legal or financial advice. You should seek professional advice regarding your specific circumstances before undertaking any transaction.

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Stamp Duty Refund

Could you be due a stamp duty refund?

Could you be due a stamp duty refund?

Recent news reports have highlighted the fact that many homeowners have overpaid their stamp duty, with many subsequently claiming refunds from HMRC. Part of the problem, it has been claimed, is that the HMRC’s online tax calculator has provided some users with incorrect calculations. This is because it does not take into account certain discounts that may be applicable to certain properties. HMRC responded by saying that the majority of people did pay the right amount and pointing out that its calculator is a free tool that is only intended to be used as a guide, not to provide an accurate final figure. Many solicitors said that they relied on the calculator, however, especially as seeking advice from HMRC can involve a long turnaround time. If you believe that you have made an overpayment due to an incorrect calculation or because you were not aware that certain reliefs were available, then you may be eligible to claim a refund for overpayment for SDLT. Our guide explains the rates that you should be paying on different types of property purchase and the exemptions and reliefs that may apply.

Stamp duty rates for residential properties

For buyers who are not first-time buyers and are purchasing a freehold residential property such as a typical home, the following rates of Stamp Duty Land Tax (SDLT) apply:
  • Properties up to £125,000: 0%, so no stamp duty is owed
  • The next £125,000 (i.e. the portion between £125,001 and £250,000): 2%
  • The next £675,000 (i.e. the portion between £250,001 and £925,000): 5%
  • The next £575,000 (i.e. the portion from £925,001 and £1.5m): 10%
  • Any portion above £1.5m: 12%

First-time buyers’ relief

A stamp duty relief for first-time buyers was introduced in November 2017. Essentially, if you are a first-time buyer purchasing a house below a certain value, then you will either pay less stamp duty or none at all. The relief applies only to properties costing £500,000 or less. If your purchase is higher than £500,000, then you will pay the standard rates of stamp duty, as shown above. If you qualify for the relief, then the following rates apply:
  • Properties up to £300,000: 0%, so no stamp duty is owed
  • The next £200,000 (i.e. the portion between £300,001 and £500,000): 5%
You should also note that if you are buying a home jointly with a partner, then they must also be a first-time buyer in order for you to qualify for this relief.

Stamp duty rates for additional properties

If you buy an additional residential property such as a holiday home, second home or a property that you intend to rent out, then you will usually have to pay extra stamp duty. The surcharge for additional properties only applies if they cost more than £40,000 and are 3% above the standard rates given above. The higher rates do not apply to any properties below £40,000, non-residential or mixed-use properties, caravans, houseboats or mobile homes. If you are buying a home with your children for them to use, then you will usually have to pay the higher rate as it could count as an additional residential property. Some mortgage providers may allow you to be a joint party without having your name on the title deeds, however. This can mean that you don’t have to pay the additional property rates, and if your child is a first-time buyer, then they might also qualify for the first-time buyers’ relief. You should seek legal and financial advice to make sure that any such product is suitable, however.

Changing your main home

If you buy a new main residence and do not or cannot sell your current main home immediately, then you will have to pay the higher rate of stamp duty as you will technically be owning two homes. The new one will count as an additional property, attracting the extra 3% surcharge. If you do go on to sell your old main home within three years, then you will be able to claim a refund on the extra stamp duty you have paid.

Homes with an annexe or “granny flat”

When the rules about additional properties were first conceived, a house with two dwellings – such as a main part and a granny flat – would initially have meant paying the extra 3% for a second home on the purchase price of the whole property. This was going to be the case even if only the main part was going to be lived in. An amendment was made, however. The Government’s guidance notes said that the amendment “removes some transactions from the higher rates of [stamp duty] where such an annex or outbuilding is the only reason that the higher rates would apply”. Now, you will only pay the standard rate on a property with a separate dwelling such as a granny flat as long as the value of the annexe is no more than a third of the total price paid. If there are more than one self-contained properties within the overall property, then their combined value must be no more than a third of the total purchase price. It’s worth noting that the granny flat or annexe does not actually have to be used as a residence. Additionally, if the self-contained parts are valued at more than a third of the total price paid but are intended to be rented out, then there may be a case for the property to be classed as mixed use or to claim Multiple Dwellings Relief (see below).

Multiple Dwellings Relief

If you have bought more than one dwelling at the same time, then you may be eligible for Multiple Dwellings Relief (MDR), which can reduce the amount of stamp duty you have to pay. To work out how much stamp duty you have to pay, follow these three steps:
  • Divide the total amount you paid for the properties by the total number of dwellings
  • Work out the stamp duty due on this figure
  • Multiply the resultant tax figure by the number of dwellings
Note that there will still be a minimum 1% rate. For example, if you bought five houses for a total of £1m, then you would follow the steps above like so: Divide £1m by 5 to get £200,000Work out the stamp duty due. This is 0% of the first £125,000 + 2% of £75,000 = £1,500£1,500 x 5 = £7,500 However, this is below the minimum rate of 1%. 1% of £1m = £10,000, which would be the stamp duty you pay.

Stamp duty on non-residential property

Property that has a commercial use has a different rate of stamp duty. This can include premises such as offices and shops but also forest, agricultural land, and purchases of six or more residential properties bought in the same transaction. The non-residential/mixed property stamp duty rates are as follows:
  • Properties up to £150,000: £0, so no stamp duty is owed
  • The next £100,000 (i.e. the portion between £150,001 and £250,000): 2%
  • Any portion above £250,000: 5%
If you have purchased a number of properties, you will want to work out whether using non-residential/mixed rates or Multiple Dwellings Relief will be more beneficial. Getting expert advice from property tax specialists can help in this area.

Mixed use property and stamp duty

Some properties might have a mixed residential and dwelling status, such as properties that combine a home with offices, agricultural buildings or agricultural land. An example might be a home with fields that are rented out to a local farmer or paddocks that are used by a riding school. A shop with a flat above it could be another example. In cases like these, you may qualify to pay the rates for stamp duty on non-residential and mixed-use properties, as listed above. This can make a significant difference, particularly for high-value property purchases. If you believe that you have paid residential rates on a property that should be classed as mixed use, then you might be eligible for a refund.

Applying for a stamp duty refund

If you want to apply for a stamp duty refund because you paid the additional home surcharge on a property that you later sold, you can find guidance on the government’s website, GOV.UK. Note that you have to make a claim of this type either within three months of the sale of the previous main home or within 12 months of the filing date of the return, whichever is the later date. If you are claiming for another reason, such as because you believe that you should have qualified for mixed-use relief, then you will need to write to the Stamp Duty Land Tax Office, quoting your Unique Taxpayer Reference Number (UTRN) and enclosing the original stamp duty tax return. You will also need to:
  • Explain why you think you overpaid your stamp duty
  • Point out which points of the return were wrong
  • Provide revised figures and a confirmation of the refund amount due
  • Confirm who any repayment should be made to
The deadline for claiming a refund on stamp duty you have overpaid is four years from the effective date of the transaction. This usually refers to the completion date for the purchase of the property.
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Stamp Duty Refund

Have you unwittingly overpaid your stamp duty?

Here’s how to claim a refund if you have overpaid…

Thousands of homeowners have already claimed refunds worth millions. You might be one of them if you have unwittingly overpaid your stamp duty.

Stamp Duty Land Tax (SDLT) is a tax paid when you buy a property in England, Wales or Northern Ireland. In Scotland, there is a similar tax called the Land and Buildings Transaction Tax (LBTT). Most people use a solicitor or legal conveyor when buying a property. They may deal with issues of stamp duty on your behalf, but it is still your responsibility as the buyer to make sure that it is paid. If it is not paid within the correct timeframe, then you may be charged penalties and interest, as well as the original tax owing.

Stamp duty is paid in bands based on the purchase price of the property. You do not currently pay anything on purchases of £125,000 or less. You pay 2% between £125,001 and £250,000, 5% on figures between £250,001 and £925,000, 10% between £925,001 and £1.5m, and 12% for anything above £1.5m. As with other stepped systems, the totals payable from each band are cumulative.

The basic system seems reasonably straightforward, but SDLT has undergone numerous changes since its inception in 2003. It has experienced more changes than any other comparable tax, in fact. It was only in 2014 that the government announced that stamp duty would change from a slab system to an incremental system. More recently, in April 2016, a 3% surcharge was added for the purchase of second homes.

Partly as a result of these many changes, the legislation governing SDLT now contains a large number of exceptions, exemptions and reliefs covering the wide range of property types and their buyers.

The confusion surrounding SDLT has led to a large number of overpayments, and HMRC has now had to issue refunds on more than 10,000 transactions, with the average refund standing above £11,000. More than £120m has been refunded to second-homeowners alone since that surcharge was introduced.

One issue pertinent in this area is that people who buy a new home without selling their current one must pay the higher rates for purchasing a second home upfront. If they sell the first property within three years, however, then they are eligible for a refund.

According to experts, many professionals who advise homebuyers are simply not familiar with all the complexities in this area and may be inadvertently offering wrong advice and tax calculations.

In one case handled by a firm of property tax advice specialists, a sole flat buyer named his partner as a guarantor and borrower on the new mortgage. He was advised that because she already owned a property, he was liable to pay the 3% surcharge for buying a second home. He ended up paying £14,000 for stamp duty, but this figure was incorrect. He should actually have paid £5,000 – a huge difference of £9,000.

The reason is that being on the joint title or mortgage does not necessarily mean that you have an “interest” in the property.

How to check and reclaim any overpaid stamp duty

The first step is to find out how much SDLT you have actually paid. If you do not know the figure, then contact the solicitor who acted for you during the purchase.

HMRC says that returns can only usually be amended within 12 months of filing. The deadline for claiming back any tax you may have overpaid, however, is four years from the “effective date” of the transaction.

If you believe that you may be due a refund, then you will need to write to the Stamp Duty Land Tax Office.

You must tell them why you believe that you have overpaid, state which parts of SDLT you believe to be in error, and submit a revised calculation. You will need to confirm the amount of refund to be paid and who it should be paid to. You will also need to quote your Unique Transaction Reference Number (UTRN) and include a copy of the original SDLT return.

Alternatively, you can engage property tax specialists to evaluate your SDLT and pursue any refund claims on your behalf. This will generally work on a no-win, no-fee basis, but there will be a charge to pay if you receive a repayment from HMRC.

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Stamp Duty Refund

Your complete guide to stamp duty

You’ve probably heard of stamp duty, but do you know how it would affect you if you were buying a property?

Essentially, if you are buying a home that costs over £125,000, then you will have to pay a certain amount of Stamp Duty Land Tax (SDLT) on it. Read on for our complete guide to stamp duty, including how it works and the difference in stamp duty for first-time buyers and those purchasing a second home.

What exactly is stamp duty?

Stamp duty is a tax that you must pay if you buy a residential property or land worth more than £125,000 in England and Northern Ireland. An exception is made for second homes – you will pay stamp duty on these if they cost more than £40,000.

You will pay the same amount of stamp duty whether you are buying a property outright or through a mortgage and whether the property is classed as freehold or leasehold.

Different taxes apply in Scotland and Wales. For properties in Scotland, you will pay a Land and Buildings Transaction Tax (LBTT), and in Wales, you will pay a Land Transaction Tax (LTT).

How much stamp duty will I pay?

The amount you pay will depend on the purchase price of the property. Stamp duty goes up in a series of bands and you are charged that band’s rate for any part of the property price falling within each band. All these amounts are added up to get your final figure.

You only usually pay stamp duty on properties purchased for more than £125,000 (except for second homes), so the first £125,000 is effectively taxed at 0%.

The progression of the bands goes as follows:

£0 to £125,000 0%
£125,001 to £250,000 2%
£250,001 to £925,000 5%
£925,001 to £1.5m 10%
More than £1.5m 12%

Say, for example, you purchased a property costing £300,000.

You would pay:

0% on the first £125,000 = £0
2% on the next £125,000 = £2,500
5% on the final £50,000 = £2,500

You would therefore pay a stamp duty of £5,000.

What about second homes?

If you buy a second home or more residential properties, then you will probably have to pay extra stamp duty on your purchases. This applies whether they are second or holiday homes, or are buy-to-let rental properties. It does not, however, apply to caravans, mobile homes or houseboats.

Essentially, you will pay an extra 3% on each band. You will pay stamp duty on second homes worth more than £40,000, however.

This means that you will pay 3% between £40,001 and £125,000, 5% between £125,001 and £250,000, and 8% between £250,001 and £925,000, etc.

If you buy a new main home but are delayed in selling your previous main home, then you will have to pay the higher rate as you will temporarily own two properties. If you do go on to sell or give away your previous main residence within three years, however, then you can apply for a refund of the additional stamp duty you have paid.

You must make this claim within three months of selling your previous main home, or within 12 months of the filing date of your SDLT tax return if this is later.

What is first-time buyers’ stamp duty relief?

First-time buyers do not pay as much stamp duty as other buyers if the property they are buying costs less than £500,000. If the property costs up to £300,000, then you will not pay any stamp duty at all. This will save you up to £5,000.

If the property costs more than £300,000 but no more than £500,000, then you will pay stamp duty on the amount between £300,001 and £500,000.

If, for example, the property costs £400,000, then you would have to pay stamp duty on £100,000 of the cost.

If it costs more than £500,000, then you will not qualify for first-time buyers’ relief and will pay the standard stamp duty on the property.

From October 2018, first-time buyers using a Shared Ownership scheme have also been eligible for first-time buyers’ relief, as long as the property costs no more than £500,000.

If you paid in stages and were not previously eligible but now are, then you may be able to claim the extra tax back.

What about stamp duty relief for joint owners?

If you are a married couple buying a home between you, then you must both be first-time buyers in order to qualify for the first-time buyers’ relief.

If you are not married, then you can only claim the relief if the only person named on the mortgage is a first-time buyer.

It’s worth remembering, however, that the maximum saving is still £5,000, regardless of how many people are named on the mortgage deed.

If you only name one person on the mortgage deed, then only their income will be considered by the lender. This could affect how big a mortgage you can get, as well as any rates or offers for which you might be eligible.

You will also need to consider what might happen if you were to split up. If only one partner is named on the mortgage, then the other could be left with nothing.

When should I pay my stamp duty?

You must submit a SDLT return and pay anything you owe within 30 days of completing the purchase of your property. If you fail to do so, then you may be charged penalties and interest by HMRC.

Are there circumstances in which I won’t have to pay stamp duty?

You do not have to pay stamp duty on properties up to £125,000. If the asking price is close to this (or to one of the other bands), then you might consider asking the seller or their agent if they would be willing to accept a slightly lower price.

There are a couple of other circumstances that might mean that you do not have to pay stamp duty:

  • Transferring property when separating

If you are getting divorced or splitting from your partner, then you will not have to pay any stamp duty if you are transferring a portion of the property to them.

  • Transferring deeds

If you transfer deeds because you are giving the house to someone else as a gift or in your will, then you will not have to pay stamp duty. If you exchange properties with another person however, then you will both have to pay stamp duty based on the market values of your properties.

How do I pay stamp duty?

You usually have to submit a return, even if your house costs less than £125,000. Your solicitor will usually deal with the return and payment and add it onto your bill, though you can also do this yourself if you choose. In either case, it is your responsibility to make sure that any money you owe is paid on time.

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Stamp Duty Refund

Stamp duty scandal as British homebuyers overpay by billions

British homebuyers could be owed a huge £2bn by the taxman for overpaid stamp duty because an online calculator got its sums wrong.

The HMRC online tool is supposed to calculate the amount of stamp duty owed after buying a property. It does not take certain discounts into account, however, which could potentially be worth thousands.

If the property has a “granny annexe”, farmland or a commercial building attached to it, for example, then discounts should apply.

One advice company based in Leicestershire said that it had seen a 400% surge in claims for repayments, while HMRC is dealing with a whopping 900 cases per month.

It said that lawyers used the HMRC tool to make calculations on the stamp duty due for their clients.

The firm said that one in six homebuyers may have paid the wrong amount of stamp duty due to this issue and that this could amount to £2bn.

HMRC denied this, however, and said that most people paid the correct amount.

It said that the online calculator should only be used as a guide, but solicitors countered by saying that the taxman treated them like accountants and that the calculations required expertise that they did not have.

The main problem is that the calculator does not have an option to class a property as “mixed use”. Stamp duty on mixed-use properties is at 5%, compared to 12% for homes worth in excess of £1.5m.

The advice firm gave some examples of homebuyers who had been massively overcharged.

It said that one couple bought a home that came with a field for £1m. They paid £43,750 in stamp duty, but this should actually have been £39,500. This is because the field had been rented by a farmer and so should have qualified for a mixed-use discount.

Another woman was reportedly stung when she bought a block of multiple flats above a café for £500,000. She ended up paying £14,500 in stamp duty, but this should have been £8,400. In this case, she should have received relief on the tax because she had bought multiple dwellings.

Yet another homebuyer was charged £30,000 for stamp duty on a £500,000 house. It should actually have been £10,000 – this time because the property had an annexe.

Sarah Dwight, a solicitor on the Law Society’s Conveyancing and Land Law Committee, said: “A lot of the calculators are not up to it.

“We write to the HMRC for guidance but we’re finding a long turnaround time, often 28 days, and that doesn’t help the chain if someone is moving house.”

HMRC countered by saying: “All reliefs are clearly signposted on stamp duty land tax returns. Our ‘ready reckoner’ provides a guide only.”

Any homebuyers who think that they might have overpaid their stamp duty can claim a refund via the government’s website, www.gov.uk.

Categories
Stamp Duty Refund

Home buyers could be owed £2bn in overpaid stamp duty

The taxman could owe up to £2bn in stamp duty repayments because the online calculator supplied by HMRC is not accurate.

The calculator, which can be accessed on HMRC’s website, does not take certain potential discounts into account.

These discounts can apply if the property has a “granny annexe”, a commercial building or farmland attached to it. They could be worth thousands, and when not factored in, this can lead to large overpayments.

One firm of tax advice specialists told the Times that it had experienced a 400% increase in claims for refunds in the past three months alone. The firm said that HMRC was dealing with around 900 cases per month.

The main reason given was the flawed HMRC calculator. It was not only being used by home buyers but also by solicitors, who were using the tool to calculate tax bills for clients.

The firm said that one in six calculations could be wrong, adding up to a total potential repayment of around £2bn.

HMRC disputed the claims, however. It said that most people paid the correct amount, and stated that the online calculator was only supposed to be used as a guide, not a means to calculate the final amount of stamp duty owed.

HMRC said in a statement: “All reliefs are clearly signposted on stamp duty land tax returns. Our ‘ready reckoner’ provides a guide only.”

According to the Times, solicitors complained that they did not have the required expertise to calculate the tax correctly. They said that HMRC essentially treated them like accountants and so they did often rely on the calculator.

The main issue is that the calculator does not allow for properties being classed as mixed use.

Homes that are purely for domestic use and are worth more than £1.5m attract a stamp duty of 12%, while mixed-use properties are taxed at just 5%.

This can make a substantial difference, and the advice firm gave an example of a property that had been bought by a couple for £1m. The calculator, which treated it as a domestic property, gave a figure of £43,750. Because the property had a field that had been rented by a farmer, however, a commercial discount should have been applied. That would have put the bill at £39,500.

Another example was a woman who bought a block of five flats for £500,000 and paid stamp duty of £14,500. She should have received a discount for multiple dwellings, which would bring the bill down to £8,400.

Sarah Dwight, a solicitor on the Law Society’s Conveyancing and Land Law Committee, told the Times: “A lot of the calculators are not up to it. We write to HMRC for guidance but we’re finding a long turnaround time, often 28 days, and that doesn’t help the chain if someone is moving house.”

According to the Times, stamp duty has become an important source of revenue for the Treasury. Last year, it raised £13bn, an increase of 95% compared to five years ago.

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Stamp Duty Refund

Homebuyers could be owed £2bn in overpaid stamp duty after HMRC’s online calculator gets it wrong

  • The government’s own calculator doesn’t include possible discounts
  • The software doesn’t differentiate between residential and “mixed use” properties

Homeowners and buyers in the UK could be owed as much as £2bn in repayments after overpaying their Stamp Duty Land Tax (SDLT), commonly known as stamp duty.

The overpayments have arisen because of failings in an online calculator provided on the HMRC website, according to reports.

The software apparently misses out a number of potential discounts. If a home has a separate annex, such as a “granny annex”, or has farmland attached to it, then it could be eligible for a discount.

Because these potential discounts are not being taken into account, it is being claimed that up to one in six calculations could be wrong. It is claimed that the calculator is not only being used by homebuyers but also by professionals such as lawyers who often rely on it to calculate tax due.

A rate of 12% stamp duty is paid on homes, while mixed-use properties are taxed at 5%, the Times reports.

It added that revenues from stamp duty had virtually doubled in the space of five years, hitting around £13bn last year.

A spokesperson from property tax specialists Thomtax said that HMRC was currently dealing with up to 900 cases every month.

They added that the tax calculator was up to the job and said that due to the volume of disputed cases, HMRC’s turnaround in responding to queries was often very long, taking up to 28 days.

HMRC said that its free online calculator should be used as a “guide only”. It added that “all reliefs are clearly signposted on stamp duty land tax returns”.   

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Stamp Duty Refund

Our principal consultants

If you’re looking for advice on Stamp Duty Land Tax (SDLT) and related issues, our team has a wealth of experience that you can trust. Headed by David Hannah, the foremost voice on SDLT in the UK, Thomtax operates a team of over 30 consultants and administrators. We have offices in London and Leicestershire and are able to provide the most accurate, confidential advice when it comes to SDLT, real estate, wealth and business matters.

David Hannah

ACA, CTA, Principal Consultant

Having built up a second-to-none reputation over three decades of working in property tax, David Hannah is now the leading voice in all things SDLT. He is frequently quoted in specialist and mainstream media on SDLT issues and also provides formal training for solicitors in this highly complex area. He is a Chartered Accountant and a Chartered Tax Advisor.

Roger Bindschedler

CTA, Strategic Tax Consultant

Roger Bindschedler spent a decade working for HMRC, building up a precise and extensive knowledge of tax affairs from “the other side of the fence”. He then moved to the private sector, where he served as a consultant for KPMG, as well as working as a partner at a number of law firms. As well as his commercial work, he is a regular legal lecturer, where he is able to pass on his considerable knowledge.