Posted on 3 September 2020
Friend Partnership’s tax specialist, David Gillies, explains why property developers regularly end up paying more Stamp Duty Land Tax (SDLT) than they should and how to avoid overpaying.
Behind every decision to either purchase bare land for development, or existing land and buildings for redevelopment looms the spectre of the Stamp Duty Land Tax (SDLT) liability. The sums involved can often be significant and it is a cost which should be carefully managed.
The plain fact is that, too often, developers overpay SDLT due to lack of proper advice. Those calculating the SDLT liability will commonly rely on HMRC’s SDLT calculator, but that is too blunt an instrument to deal with the calculation of a tax which can be so intricate. Put simply, the SDLT calculator is probably one of the biggest money spinners that HMRC possesses.
Common errors which occur when calculating SDLT:
- getting the “effective date” wrong
- not recognising “linked transactions”
- not recognising “mixed use” property
- failing to claim appropriate reliefs
The effective date
SDLT legislation instructs us that a tax liability arises on the “effective date”. Many consider that the effective date is the date of completion and for most transactions that could well be the case. What the rules actually say is that the effective date is the date of completion or the date on which the contract is “substantially performed” if that is earlier.
The substantial performance of a contract can take place when most of the purchase price is paid or when the purchaser has unfettered access to the land. In some cases, substantial performance could take place well before the actual date of completion of the contract, triggering a liability that the developer is not prepared for.
It is important for developers to manage their SDLT liability by being in control of the effective date.
For SDLT purposes transactions are linked if they are part of an arrangement comprising a series of transactions between the same vendor and purchaser or people connected with them.
All transactions which are linked with each other in this way are treated as part of a single transaction and subjected to SDLT accordingly. Common sense would lead suggest that this results in a much higher SDLT liability but this is not always the case. Sometimes the linked transaction rule can change the subject matter of the purchase from residential to non-residential or it can enable access to reliefs (such as multiple dwellings relief) which will substantially reduce the overall liability.
Mixed use property
It is important for developers to know whether what they are buying constitutes purely residential property or property which has a mixed use. The subject matter of a transaction is very important because it dictates the rate of duty payable and can also mean that the 3% additional rate for residential property is not due.
There are a number of SDLT reliefs available. Sadly, it is often the case that the appropriate reliefs are not claimed because the purchaser is not aware of their existence or has not planned carefully enough to ensure that they qualify for any relief.
Three areas which are particularly problematic are:
- The purchase of more than one dwelling and recognising at which point bare land or commercial property becomes a dwelling for the purposes of SDLT.
- Group relief, available for the transfer of properties between companies within the same group.
- Relief for LLP’s and partnerships. There are extremely complicated rules surrounding partnerships but a good understanding of them can sometimes result in SDLT not being payable at all.
Accessing the correct SDLT advice
Friend Partnership can provide specialist SDLT advice for developers. We have a detailed knowledge of the subject and the ability to guide developers through the maze of rules. It is our aim to ensure that our clients correctly understand the nature of their transaction, control the timing of any tax liability and claim all the available reliefs.