Stamp Duty Land Tax (SDLT) can be extremely complicated, especially when claiming reliefs that significantly reduce your tax liability. HMRC is taking a much keener interest and is frequently challenging SDLT claims, as Hillier Hopkins explained in the Financial Times on 14 February 2023.
The boundaries can be particularly blurred for property developers completing minor renovations, such as replacing windows or floors, but who then struggle to sell. It is not uncommon for HMRC to consider a developer that holds on to a building to be a buy-to-let investor and face an unexpected tax bill.
What to do if HMRC challenges your SDLT claim.
The first step is to confirm whether HMRC’s enquiry has been raised within the statutory time limits. HMRC can usually open an enquiry within nine months and fourteen days from the effective date (usually completion) and are entitled to enquire whether the correct amount of tax has been paid. That window can be extended if you have since amended your submitted SDLT return.
Assuming the enquiry is valid, the point of contention is whether you are a BTL investor or property trader. The distinction matters as property traders can, in certain circumstances, benefit from a 100% relief from SDLT.
To qualify, a property trader must be a company or Limited Liability Partnership (LLP) which carries out the business of buying and selling property. Relief is not available to sole traders, individuals, or individuals in partnership.
This relief is designed specifically to help facilitate the property market to keep things moving and is applicable in very specific scenarios. There are two which could apply to your situation are: purchases from personal representatives of a deceased person, or when you step into a chain which has broken down. However, always check HMRC’s fine print as there are conditions attached which must be met by the purchaser and by the previous owner.
This relief is geared towards ‘flip and sell’ traders as any refurbishment works are limited to £10,000 or, if greater, 5% of the consideration, up to a maximum of £20,000.
If all conditions are met, a property trader can receive up to full relief from SDLT, representing significant tax saving.
HMRC may believe you are a buy-to-let investor if the property was rented, even if for a short period of time. The relief is not usually available if you rented the property for just one day. There is, however, one exception if you stepped into a chain which has broken down: the relief is still available to you if you rented the property back to the previous owner for a period of less than six months.
Additionally, continuity with direct taxes should also be considered, if the SDLT property trader relief is correctly claimed, the property should be held as trading stock within your financial statements. This means trading profits will be subject to tax at the appropriate rates (income tax for LLP’s and corporation tax for companies). In comparison, investment properties will be shown within the investment property section in your financial statements and any uplift in value (gains) may be subject to lower rates of tax.
Given the specific conditions attached to residential property reliefs it is recommended to seek advice from a SDLT specialist and to talk to your tax adviser to ensure your overall tax position for the property is consistent.
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