Practice Area: Residential Conveyancing

Tax avoidance schemes are not always effective and can have serious unforeseen consequences. In a telling case on point, a man was required to pay the entirety of the Stamp Duty Land Tax (SDLT) due on a seven-figure property transaction, a bill that he would otherwise have shared equally with his then wife.

The then couple initially contemplated a straightforward purchase of the property for £1.075 million. Had that happened, the property would have been conveyed into their joint names, rendering them equally liable to SDLT. In the event, however, they elected to take a different course with a view to saving SDLT.

The scheme envisaged that the wife alone would agree to purchase the property for £1.075 million. She would then agree to sell it on to the husband for £10,000. The property’s freehold would then be transferred by the vendors directly to the husband alone. The husband subsequently declared to HM Revenue and Customs (HMRC) that the chargeable consideration for the purchase was £10,000 and that no SDLT was due.

HMRC disputed that proposition and the husband conceded that the scheme had not worked as planned and was ineffective. He was required to pay SDLT on a purchase price of £1,085,000. That was £10,000 more than if the scheme had not been carried out. Following the couple’s divorce, the First-tier Tribunal (FTT) agreed with HMRC that the whole SDLT liability fell on the husband alone.

Challenging that outcome, he argued that, following the property’s transfer, he held it on implied trust for himself and his wife. As they were joint beneficial owners of the property, he said that he should only be liable for one half of the SDLT bill. The Upper Tribunal (UT), however, found no fault in the FTT’s conclusions on the evidence and dismissed his appeal.

The UT noted that, in essence, the failed scheme required the husband to become the property’s sole beneficial owner on completion of the purchase. That was what the couple intended and some care was taken to achieve that result. He was to be regarded as the transferee under the conveyance, which vested the property, both legally and beneficially, in him alone.

A newly purchased house may require a great deal of renovation and repair work to render it habitable – but does that mean it is unsuitable for use as a dwelling for the purposes of Stamp Duty Land Tax (SDLT)? A tribunal considered that issue in a guideline case.

A couple paid over £1.7 million for a detached house that had in the past been tenanted but which had been empty for some months prior to its acquisition. Amidst signs of vandalism, the property was strewn with rubbish and the kitchen gave off an unbearable smell. The boiler was hanging off the wall, the basement was flooded by leaking water pipes, utilities could not safely be used and the property’s electrical wiring was in a life-threatening condition.

The couple paid £177,000 in SDLT on purchasing the property, but subsequently asserted that they were entitled to a rebate of almost £100,000 on the basis that it was not suitable for use as a dwelling on the date of acquisition. The matter came before the First-tier Tribunal (FTT) after HM Revenue and Customs took a contrary view.

Ruling on the matter, the FTT accepted that the state of the property was not such that a reasonable buyer might be expected to move in straight away. Amongst other things, the property required complete rewiring and installation of a new boiler and pipework. Broken windows and doors required repair to make the property secure and skip loads of rubbish had to be removed.

In rejecting the couple’s challenge, however, the FTT noted that suitability for use as a dwelling house is not equated with immediate readiness for occupation. In the context of SDLT, only very serious, fundamental problems – such as radioactivity or a risk of imminent structural collapse – are sufficient to render a property unsuitable for such use.

Whilst accepting that it would have been dangerous for the couple to move into the property immediately, the FTT noted that the relevant defects were curable. They were not fundamental and did not come anywhere near the threshold at which a reduced rate of SDLT is payable.

HM Revenue and Customs (HMRC) are big battalions by anyone’s standards, but their word is not law and, with expert legal assistance, they can sometimes be proved wrong. In one case, a couple succeeded in overturning six-figure Capital Gains Tax (CGT) demands raised against them following the sale of their home to a developer.

The couple reluctantly sold their substantial home when faced with the prospect of new houses being built all around them. On the basis that the property was their principal private residence (PPR) and thus exempt from CGT, they did not report the gain arising from the sale on their tax returns. About three years later, however, HMRC raised CGT demands of £162,820 against each of them.

HMRC asserted that the property’s garden – which extended to 0.94 hectares – was larger than it needed to be and that CGT relief was only available in respect of 0.5 hectares. However, in challenging the demands before the First-tier Tribunal (FTT), the couple contended that the whole of the garden was required to enable reasonable enjoyment of the property.

Ruling on the matter, the FTT noted that, in determining whether the garden was larger than required, context was everything. At one extreme it might be said that nobody needs a garden at all. At the same time, what might be viewed as a large garden in a city centre would be considered far too small for a stately home.

Upholding the couple’s appeal, the FTT observed that the property was located in a rural setting and comprised a large main house, a one-bedroom cottage, a three-car garage and a swimming pool. The garden was proportionate to the property’s scale and character and its size was comparable to the grounds of other substantial country homes. The couple were thus entitled to full PPR relief in respect of the property’s sale and the CGT demands were reduced to nil.