A SanTAX Quiz - Testing your knowledge of SDLT developments in 2024

Here's a quick SanTAX quiz question for you:

If you have been very good this year and Santa was planning to get you a duplex (and the rest of the building) which of these properties would incur the highest SDLT charge?  

1. Block of five flats, no shop, consideration of £1.1m
2. Block of six flats, no shop, consideration of £1.2m
3. Block of five flats and a shop, consideration of £1.3m
4. Block of six flats and a shop, consideration of £1.4m

If you chose Option D I would forgive you. Generally, the more expensive a property transaction is, the higher the SDLT burden.

But in fact, Option A results in SDLT of £106,250, an effective rate of 9.7% (or £128,250, effective rate 11.7%, if the purchaser is a non-resident, for example because he lives in the North Pole).

Last Christmas, the SDLT on Option A would have been £33,000 (effective rate 3%) (or £55,000 for a non-UK resident).

So what has changed? How has buying the same property almost trebled in SDLT cost?
 

Key SDLT developments this year

There have been two major developments this year:

• First was the abolition of Multiple Dwellings Relief ("MDR") in Spring 2024 (which enabled purchasers to pay SDLT at rates based on the average value of each dwelling, rather than the overall value of the portfolio).
• Second was the Government's announcement in the Autumn Budget which (departing from Labour's manifesto prior to the election) increased the rate of the surcharge applicable to all purchasers who own more than one property from 3 to 5%.

Why then, is Option B not the most expensive? It also no longer qualifies for MDR yet has a total SDLT liability of £49,500 (effective rate 4.1%) regardless of the status of the purchaser (compared to £36,000, effective rate 3%, that a UK resident purchaser would have paid this time last year). There is still an increase in the cost of acquiring the property, but it is nowhere near as significant.

This is the result of Section 116(7) Finance Act 2003 ("FA 2003"), fondly referred to as the "rule of six". It tells us that if six or more dwellings are acquired in a "single transaction" (more on this later) then it qualifies for non-residential rates of SDLT (i.e. a maximum rate of 5%).

At this stage, most readers may breathe a sigh of relief as vanilla acquisitions of a large block of flats under one SPA and between the same parties must surely be a single transaction and so able access the lower rates. However, what amounts to a "single transaction" is not defined under the legislation, so what are the limits to this?
 

Single Transactions

Next quiz question. Santa wants to buy a number of chalets for his elves so takes a look at some newbuild developments. Which of these arrangements would qualify as a single transaction?

1. A transaction between the same parties, for a sale of ten units across a single development on the same day
2. A transaction between the same parties, for a sale of ten units across two developments on the same day
3. As per B but the parties enter into (at the same time) separate contracts in respect of the units in each development (four units in one, six in another)
4. As per B, but the units are to be drawn down in tranches of three or four over a period of time.

Common sense would tell you that Option A is a single transaction. Whilst not free from doubt, Option B is a pretty safe bet too.

HMRC has indicated it will view all transfers made pursuant to a single contract as a single transaction, even if each transfer has a different effective date. However, this view was given in the minutes of a meeting between the Chartered Institute of Taxation, the Stamp Taxes Practitioners Group and HMRC, rather than forming official published guidance or confirmed law.

Based on this, Option D is also a single transaction, notwithstanding there will be multiple effective dates.

Whilst Option C includes a single transaction which could qualify for non-residential rates (the six units which are dealt with under a single contract), on the basis of the HMRC view noted above, the other four units would be a separate single transaction and so would not be treated as non-residential under s.116(7) of the FA 2003.
 

Linked Transactions

However, there is a further twist. Section 55(1C) of the FA 2003 tells you that if you have "linked transactions" which include a non-residential property then the non-residential rates apply across the board.

Linked transactions are different from single transactions, and much more flexible, requiring that the transactions are part of the same commercial deal or, to be more precise "they form part of a single scheme, arrangement or series of transactions between the same vendor and purchaser or, in either case, persons connected with them."

So, on that basis, provided you can conclude that the transactions provided for in both SPAs in Option C are linked (which is normally straightforward), the four units that don't fall within the "rule of six" can still access the non-residential rates.

This is also the reason why Option C in our first quiz question (five flats and a shop) has a lower SDLT cost than Option D. Despite the higher price, the inclusion of a shop in the transaction means that the whole consideration qualifies for non-residential rates.

However, if in Option C of the first quiz the contract for the four units completed first, then it would seem that the purchaser (Santa) would have had to file and pay SDLT on the basis of the higher residential rates, and then later, when the units under the second SPA were transferred, amend the original SDLT return on the basis that there had been a later linked transaction and claim a refund from HMRC.

And of course, had there been five units under each contract, then it would seem that the non-residential rates would not kick in at all!

Further complications arise where there is intended to be, or even the possibility of, multiple purchasers for different tranches (who may or may not be connected) and in the context of framework agreements, where it may not be possible to identify at the outset exactly which units will be acquired.

Such complications, even if you can ultimately get to a sensible conclusion, can lead to significant compliance burdens, as well as cash flow implications.
 

Conclusion

So, what's the takeaway from our festive SDLT challenge? Understanding the nuances between linked and single transactions and paying attention to the detail of how transactions are documented and how land-drawdown is effected can lead to substantial savings!

This holiday season, may your residential property acquisitions be merry, bright, and well-planned!

Come back tomorrow for our thoughts on the extent to which this year's new government has brought a new direction for planning reform.